Short Term Outlook Remains “Neutral/Negative”
Opinion: The indexes closed mostly higher Friday with only the VALUA closing lower on the day. The charts were left largely unchanged at the close although we are noting some weakening in breadth. The data remains a mixture of signals. As a result, we are maintaining our near term “neutral/negative” outlook for the major equity indexes based on extended valuation and advisor complacency to which we can now add apparent weakening market breadth.
· On the charts, only the VALUA (page 5) closed lower on Friday as it also flashed a “bearish stochastic crossover signal”. Internals were mixed on the exchanges. The NYSE saw positive breadth but negative up/down volume while the NASDAQ saw the reverse. The DJI (page 2) did manage to make another marginal new closing high. What we believe may be worthy of note is the weakening of breadth in some of the advance/decline lines for the exchanges. The All Exchange advance/decline has turned neutral form positive while the NASDAQ A/D turned negative from neutral. The NYSE A/D is now the only one in a positive trend. We interpret this weakening as a potential hindrance to further technical market progress.
· The data remains mixed. All of the McClellan OB/OS Oscillators are neutral (All Exchange:-2.14/+31.08 NYSE:+3.62/+45.77 NASDAQ:-10.7/+10.55) along with the Total Put/Call Ratio at 0.83. The Equity and OEX Put/Call Ratios are counterbalancing with a bullish 0.72 and bearish 1.57 respectively. The Gambill Insider Buy/Sell Ratio still finds insiders as active sellers with a bearish 7.2 reading while advisor sentiment measured by the Investors Intelligence Bear/Bull Ratio (contrary indicator) remains a concern as advisors are overly bullish at 17.5/61.2.
· In conclusion, we are maintaining our near term “neutral/negative” outlook for the major equity indexes as possible weakening of breadth is now added to our concerns of extended valuation of a 17.9 forward 12 month multiple for the SPX and advisor complacency.
· Forward 12 month earnings estimates for the SPX from IBES of $132.21 leave a 5.58 forward earnings yield on a 17.9 forward multiple, a decade high.
SPX: 2,281/NA
DJI: 19,946/NA
COMPQX; 5,670/NA
DJT: 9,225/9,411
MID: 1,697/NA
RTY: 1,377/1,357
VALUA: 5,387/NA