Indexes Continue Up As Data Continues To Caution
Opinion
Over the past two weeks, our comments have suggested caution regarding the near term outlook for the major indexes given the current state of the data and extension of the rally. So far, we have been on the wrong side of the call. Yet our disciple continues to keep us short term cautious for the same reasons. The data continues to send some strong and typically reliable warnings while bears are near to becoming an extinct species. Forward P/E ratios for the SPX are historically stretched as well. Yet the indexes grind higher. How much further they will climb is debatable. However, we are still of the opinion that the indexes are nearing the top rung of their respective short term ladders as their foundations become less stable.
- On the charts, the DJT (page 3) made yet another new closing high yesterday as the COMPQX (page 3) made another new 14 year high. The SPX (page 2) and DJI (page 2) closed fractionally lower. Internals were mixed on the NYSE as down volume exceeded up volume although the A/D was positive. So the charts remain in the same condition. They appear extended but have yet to yield technical sell signals. Their trends remain up.
- As all will know, the data is what keeps nagging us. Bears have largely disappeared from the “crowd” as described by the new Investors Intelligence Bear/Bull Ratio (contrary indicator) of 14.8/55.5, an historical extreme. The Rydex Ratio (contrary indicator) also shows the leveraged ETF traders at peak bullish sentiment of 63.7. As a reminder, these are levels that were seen prior to the last correction. At the correction lows, these data points had moved to the opposite extreme.
- The pros measured by the OEX Put/Call Ratio continue to press their bets on expected weakness up to a very cautionary 2.16 while the WST Ratio and its Composite remain at cautionary levels of 68.1 and 156.9. As well, all of the McClellan OB/OS Oscillators are overbought with the NYSE 21 day extremely so at +117.35. Data warnings abound.
- As per valuation, First Call 12 month forward estimates of $127.99 for the SPX yield a 15.9 forward multiple, a decade high.
- So for the near term, we are watching the indexes climb without us as several points imply the ice is very thin.
- For the longer term, we remain bullish on equities as they remain comparatively undervalued with a 6.28% forward earnings yield for the SPX based on 12 month IBES forward earnings estimates of $127.99 versus the U.S. 10-Year yield of 2.36%.
- S&P 500: 2,000/?
- Dow 30: 17,283/?
- NASDAQ Composite: 4,568/?
- Dow Jones Transportation: 8,772/?
- S&P Midcap 400: 1,420/1,439
- Russell 2000: 1,159/1,186