Near Term Outlook Remains “Neutral”
Opinion: All of the indexes closed higher yesterday with positive internals as volumes rose from the prior session on both the NYSE and NASDAQ. Some new closing highs were achieved but the bulk of the indexes remain in their current sideways patterns. The data is now a mixture of neutral and cautionary readings. However, we still have yet to see enough of a shift in the evidence, in our opinion, to warrant a change in our current “neutral” short term outlook for the major equity indexes.
- On the charts, all of the indexes closed higher yesterday with positive internals. New closing highs were achieved on the SPX (page 2) and COMPQX (page 3). We would, however, note that with the SPX at new highs, only 58.2% of its components are above their 50 DMAs suggesting a fairly high level of selectivity. And while the COMPQX is at new highs and the NASDAQ Advance/Decline line has turned sideways, it continues to be on a “bearish divergence” signal, also revealing high selectivity. The net result is that the SPX and COMPQX are the only indexes in short term uptrends while the rest continue their neutral rectangle patterns.
- The data has turned a bit more mixed. The bulk of the McClellan OB/OS Oscillators are neutral with the 21 day NYSE being the outlier at a mildly overbought level (All Exchange: +3.13/+42.83 NYSE:+4.23/+52.79 NASDAQ:-0.28/+38.01). Caution signals are coming from the Equity Put/Call Ratio (contrary indicator) as the crowd is long calls at 0.55 while the OEX Put/Call Ratio finds the pros remain weighted in puts at 1.7. The Investors Intelligence Bear/Bull Ratio (contrary indicator) still finds advisors almost completely on one side of the boat as bulls well outweigh bears at 17.3/58.7 while the ISEE Sentiment Index (contrary indicator) is a bearish 10.4. We would also note the forward p/e for the SPX is back up to historically high levels at a 17.9 multiple.
- In conclusion, while the above data and divergences continue to be of concern, we are of the opinion that a break of support levels on the charts would likely be required to alter our near term “neutral” 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 17.9 forward multiple, near a decade high.
SPX: 2,381/NA
DJI: 20,659/21,008
COMPQX; 6,053/NA
DJT: 8,984/9,231
MID: 1,719/1,749
RTY: 1,377/1,400
VALUA: 5,447/5,554