Psychology Suggests Caution
Opinion: The indexes closed mostly lower yesterday with slightly negative advance/decline statistics while up/down volumes were more broadly negative and greater overall volumes versus the prior session. Little change was seen on the charts other than one “bearish stochastic crossover signal” being generated. The trends remain mixed while the data is mixed as well with a bit more caution coming from the psychology statistics. As such, we have yet to see sufficient reason to alter our near term “negative” outlook for the major equity indexes as the advances remain very selective while valuation remains stretched and investment advisor complacency remains high.
- On the charts, the DJT (page 3) and MID (page 4) inched higher yesterday as the balance of the indexes declined slightly. Advance/decline stats were slightly negative but up/down volumes more broadly so, suggesting selling pressure may have been greater than the indexes implied. No support levels were violated. However, we did see a “bearish stochastic crossover” warning signal appear on the MID. The stochastics remain overbought on the SPX (page 2), DJI (page 2), COMPQX (page 3) and DJT. The short term trends remain mixed as well with the SPX and COMPQX positive while the DJI, DJT and MID are neutral and the RTY (Page 4) and VALUA (page 5) negative.
- The data is mixed. All of the McClellan OB/OS Oscillators are still neutral (All Exchange:-10.88/+0.22 NYSE:-7.98/+18.14 NASDAQ:--14.48/-16.62) as are the Equity Put/Call Ratio (0.63) and Open Insider Buy/Sell Ratio (44.6). Caution, in our opinion, coming from psychology has risen a bit as The ISEE Put/Call Ratio that measures “customer only opening transactions” is now bearish at 12.7 while the Investors Intelligence Bear/Bull Ratio (contrary indicator) still finds advisors devoid of concerns at 18.3/51.9 and the Rydex Ratio (contrary indicator) is near peak levels of leveraged ETF long exposure at 71.2.
- In conclusion, with the SPX forward P/E back at an 18.0 multiple with advisors wearing their party hats as well as the other issues discussed above, we remain of the opinion that there is enough risk present to warrant maintaining our near term “negative” outlook for the major equity indexes.
- Forward 12 month earnings estimates for the SPX from IBES of $134.56 leave a 5.63 forward earnings yield on a 18.0 forward multiple, near a decade high.
SPX: 2,383/NA
DJI: 20,888/21,117
COMPQX; 6,121/NA
DJT: 9,091/9,192
MID: 1,715/1,738
RTY: 1,350/1,376
VALUA: 5,368/5,466