Data Continues Cautious Message
Opinion: The indexes closed mostly higher yesterday with the DJT being the one exception. Internals were positive as volumes declined, most notably on the NYSE. There was a small mix of technical signals generated, both positive and negative. The data has intensified its cautionary message for the near term to the point of shifting our short term outlook to “neutral/negative” from “neutral”. The intermediate term remains “neutral” due to historically high valuation of the SPX.
- On the charts, the only index closing lower on the day yesterday was the DJT (page 3). Internals were positive on both exchanges as volumes declined from the prior session, especially on the NYSE. We interpret the slowing in volume as a lessening of demand. On the positive side, the COMPQX (page 3) closed above its near term resistance. However, the MID (page 4) closed below its short term uptrend line, joining the SPX and COMPQX in their violations last Friday. All of the stochastic levels remain overbought though no “bearish crossovers” have been generated yet. As such, there are no blatant sell signals on the charts at this point. Nonetheless, it would not be the least bit unusual to see the recent1,500 point gain in the DJI experience some consolidation/giveback. In fact, it would be healthy, in our opinion.
- The increase in the warning signals from the data is the primary cause of our shift in outlook. The WST Ratio and its Composite are now on a “bear alert” signal at 83.6 and 200.9 respectively. All of the McClellan OB/OS Oscillators are overbought, although the 1 day levels are modest (All Exchange:+53.46/+98.5 NYSE:+54.22/+126.27 NASDA:+58.4/+75.73). The OEX Put/Call Ratio (smart money) is a very bearish 2.48 as the pros are now very heavily invested in puts as they expect near term weakness. Finally, the Gambill Insider Buy/Sell Ratio that saw insiders buying heavily at the recent lows now stands at a bearish 6.7 as they increase their selling, apparently viewing present levels as a selling opportunity.
- In conclusion, the data has moved sufficiently, in our opinion, to warrant a change to “neutral/negative” for our near term market outlook. With the forward p/e for the SPX at a decade high of 17.2X, valuation keeps us neutral for the intermediate term.
- Forward 12 month earnings estimates for the SPX from IBES of $126.29 leave a 5.83% forward earnings yield on a 17.2 forward multiple.
SPX: 2,080/NA
DJI: 17,722/NA
COMPQX: 4,971/5,104
DJT: 7,878/8,104
MID: 1,489/1,547
RUT: 1,158/1,224
VALUA: 4,692/4,895