Rule Of Twenty Close To Fair Value
The indexes closed higher Tuesday with positive internals on the NYSE and NASDAQ as trading volumes rose on both exchanges from the prior session. Three of the indexes managed to make new closing highs while the near term trends are unchanged. The data remains largely neutral although we now find the SPX very close to fair value while investment advisors have shifted to the point of being a bit overly bullish. Nonetheless, we have yet to see enough of a shift in the evidence to alter our near term “neutral/positive” outlook for the major equity indexes.
On the charts, all of the indexes closed higher yesterday with positive internals on heavier trading volumes.
- The SPX (page 2), COMPQX (page 3) and NDX (page 3) all managed to make new closing highs while the DJI (page 2) closed at resistance.
- However, the trends remain unchanged with the MID (page 4), RTY (page 5) and VALUA (page 5) remaining neutral with the remainder in uptrends.
- The NASDAQ cumulative advance/decline line turned positive from neutral as are the All Exchange and NYSE.
- So far, we have not seen any warning signals of note from a technical viewpoint
The data remains largely neutral including all of the 1 day McClellan OB/OS Oscillators (All Exchange:-3.33 NYSE:-6.07 NASDAQ:+0.81).
- The Open Insider Buy/Sell Ratio remains neutral at 39.2 although insiders have curbed their buying appetite notably.
- The % of SPX stocks trading above their 50 DMAs is neutral with a 73.3% reading.
- Crowd sentiment has shifted a bit. The detrened Rydex Ratio (0.7) and new AAII Bear/Bull Ratio (23.0/37.33) remain neutral. However, the Investors Intelligence Bear/Bull Ratio (contrary indicator) shows investment advisors becoming slightly overly bullish at 19.2/54.8 now that some indexes are posting new highs.
- As well, the 12 month forward consensus earnings estimate from Bloomberg for the SPX now stands at $171.90, leaving the forward p/e at a 17.1 multiple while the “rule of twenty” finds fair value at 17.4. As such, this now suggests the SPX is essentially fairly valued at these levels.
In conclusion, while we are maintaining our near term market outlook at “neutral/positive”, advisor sentiment combined with valuation suggest the indexes may have to earn their stripes by posting strong earnings going forward.