Charts See More New Closing Highs
Opinion: Most of the indexes closed higher yesterday with positive internals on the NYSE and NASDAQ as volumes rose from the prior session. More new closing highs were achieved on the charts while the data is a mixed bag but mostly neutral. No events occurred on the charts or data to alter our near term “neutral/positive” outlook for the major equity indexes. However, we reiterate the facts that investment advisor sentiment is overly bullish while valuation is at decade highs, both of which suggest some curbing of enthusiasm is appropriate.
On the charts, the only index unable to close higher on the day yesterday was the DJT (page 3). The rest of the indexes achieved new closing highs with their short term uptrends intact. As such, we have yet to see any sell signals generated to turn the charts more cautionary. However, with all of the stochastic levels well into overbought territory, we think it wise to not get carried away with overly bullish expectations. Nonetheless, until some cautionary chart signals are generated that may include bearish stochastic signals, the current uptrends should be respected.
The data is a bit mixed but mostly neutral. Only the NYSE 21 day McClellan OB/OS Oscillator is in overbought territory as the rest are neutral (All Exchange:+41.87/+37.54 NYSE:+36.28/+53.0 NASDAQ:+41.24/+16.82). The Gambill Insider Buy/Sell Ratio also remains neutral at 10.0. On the other hand, the put/call ratios are conflicting. The Total and Equity Put/Call Ratios (contrary indicators) find the crowd too bullish and long calls at 0.7 and 0.53 while the OEX Put/Call Ratio (smart money) is a mildly bullish 0.94 with the pros slightly weighted to calls and expecting more strength. As such, this grouping of data is fairly evenly balanced.
Yet we believe it appropriate to reiterate what we view as two disturbing factors. The Investors Intelligence Bear/Bull Ratio (contrary indicator) shows an almost complete absence of market concern on the part of advisors at 16.7/62.7 while the forward valuation of the SPX based on forward 12 month earnings estimates from IBES at a decade high of a 17.7 multiple. Such excessive optimism and valuation implies any bump in the road ahead for the markets may have greater impact than might otherwise be anticipated. So although we maintain our near term “neutral/positive” view, some restraint is highly advisable, in our opinion.
Forward 12 month earnings estimates for the SPX from IBES of $132.33 leave a 5.66 forward earnings yield on a 17.7 forward multiple, near a 12 year high.
SPX: 2,277/NA
DJI: 19,946/NA
COMPQX; 5,576/NA
DJT: 9,141/NA
MID: 1,697/NA
RTY: 1,356/1,357
VALUA: 5,387/NA