Psychology Turning Cautionary
Opinion: All of the indexes closed higher yesterday although gains were quite modest. Internals were positive on both exchanges as volume rose on the NYSE but declined on the NASDAQ. All closed near their intraday midpoints or lows. Some resistance levels were tested but failed to be violated. All short term uptrends remain intact. However, the psychology data is turning cautionary, resulting in our maintaining our near term “neutral” outlook. Valuation remains a concern for the intermediate term as it is nudging up against historically high levels.
- On the charts, all of the indexes closed higher but the progress was modest at best with all closing near their intraday midpoints or lows.. No technical events of import were generated. The SPX (page 2), DJI (page 2) and RUT (page 4) tested resistance but none were able to violate on a closing basis. All short term uptrends remain intact with all of the stochastic levels remaining in overbought territory but having yet to flash bearish crossover signals.
- Looking at the data, the McClellan OB/OS Oscillators are split between neutral and overbought readings (All Exchange:+47.31/+53.2 NYSE:+55.62/+72.87 NASDAQ:+39.14/+32.36). None of the overbought levels are extreme. However, the psychology data has taken on a more cautionary tone, particularly with the Gambill Insider Buy/Sell Ratio turning a bearish 6.5 as insiders have turned net sellers versus their buying at the February market lows. The new Institutional Investor Bear/Bull Ratio (contrary indicator) has turned rather bearish as well at 21.7/47.4 with bullish advisors now well outweighing those that are bearish. Their opinions were the opposite at the February lows. The Rydex Ratio (contrary indicator) still shows the leveraged ETF traders very heavily leveraged long at 56.2 adding to the darkening of the psychology message while the OEX Put/Call Ratio (smart money) finds the pros very long puts at 3.3. As such, the overall data outlook is now less than encouraging, in our opinion.
- In conclusion, we remain near term “neutral” due to the extent of the rally that is now seeing psychology flashing some warnings although the charts have yet to confirm.
- For the intermediate term, we remain “neutral” as the forward 12 month p/e based on IBES forward 12 month earnings estimates has lifted to a 17.0 multiple and just shy of the level seen prior to the January correction.
- Forward 12 month earnings estimates for the SPX from IBES of $123.58 leave a 5.88% forward earnings yield on a 17.0 forward multiple.
SPX: 2,074/2,106
DJI: 17,541/8,114
COMPQX; 4,836/5,001
DJT: 7,921/8,239
MID: 1,451/1,491
RUT: 1,093/1,146
VALUA: 4,525/4,685