Short-Term Downtrends Intact

Data Mixed

Opinion

All of the indexes closed higher yesterday with positive internals on the NYSE and NASDAQ as volumes rose on the NYSE and declined on the NASDAQ from the prior session. However, no resistance or support levels were violated, leaving the bulk of the short term trends for the indexes negative. The data remains a mixed bag with no strong near term directional implications. As such, given the current short term trends, extended valuation of the SPX, historically high margin debt and investment advisor complacency, we are maintaining our near term “negative” outlook for the major equity indexes.

• On the charts, all of the indexes closed higher yesterday with positive internals after Wednesday’s bearish intraday reversal. No resistance or support levels were violated as a result of yesterday’s trade. In fact, the short term downtrends on the SPX (page 2), DJI (page 2), MID (page 4), RTY (page 4) and VALUA (page 5) remain intact. The COMPQX (page 4) and DJT (page 4) remain in their current neutral patterns.

• The data is a mixed bag. The bulk of the McClellan OB/OS Oscillators are neutral with the exception of the NYSE 21 day that is now mildly overbought (All Exchange:-3.48/+15.76 NYSE:+34.13/+54.45 NASDAQ:-7.52/+6.7). The Equity Put/Call Ratio is a neutral 0.66 while the Total (contrary indicator) and OEX Put/Call Ratios are in bullish territory at 0.9 and 0.37 respectively. The new AAII Bear/Bull Ratio (contrary indicator) finds the crowd getting nervous at 39.62/28.3.

• What remains a concern, that has been noted in our recent comments, is margin debt having swollen 21% on a y/y basis to a record of over $513 billion while investment advisors remain complacent via the Investors Intelligence Bear/Bull Ratio (contrary indicator) at 18.3/55.8 while the forward valuation of the SPX based on forward 12 month earnings estimates from IBES remains near a decade high at a 17.8 multiple. The combination of these factors suggests to us a relatively high level of risk is currently present in the equity markets.

• In conclusion, we have yet to see a sufficient shift in the weight of the evidence to alter our near term :”negative” outlook for the major equity indexes.

• Forward 12-month earnings estimates for the SPX from IBES of $132.89 leave a 5.63 forward earnings yield on a 17.8 forward multiple, near a decade high.
• SPX: 2,342/2,373
• DJI: 20,528/20,865
• NASDAQ: 5,795/5,923
• DJT: 8,906/9,188
• MID: 1,687/1,728
• Russell: 1,338/1,384
• VALUA: 5,342/5,477