Risk Issues RemainOpinion
The indexes closed higher yesterday with new closing highs on the SPX and DJI. Internals were negative on the NYSE and positive on the NASDAQ as volumes declined from Friday’s levels. The data remains mixed. We remain of the opinion that although the near term trends of the various indexes should be respected, a significant amount of risk is present due to historically high valuation, excessive margin debt, weakening market internals and complacency on the part of investment advisors.
- The indexes closed higher yesterday with the SPX (page 2) and DJI (page 2) making new closing highs. However, we would note said highs were achieved with negative breadth and negative up/down volume on the NYSE on light overall volume. This action is yet another example, in our view, of the ongoing internal deterioration of the equity indexes as seen in the following points. The SPX and DJI are the only indexes in short term uptrends with the COMPQX (page 3) neutral. All of the rest of the indexes are in near term downtrends. As well, the % of SPX components above their 50 DMAs remains in a downtrend at 61.2%. Cumulative advance/decline lines are negative on the All Exchange and NASDAQ with the NYSE neutral. Fewer and fewer stocks are keeping the ship afloat.
- The data is mixed. All but the NYSE 21 day OB/OS Oscillators are neutral with the NYSE 21 day mildly overbought (All Exchange:-27.79/+24.62 NYSE:-25.64/+51.52 NASDAQ:-29.65/0.54). New margin debt data shows an increase of 20.5% y/y while the new Investors Intelligence Bear/Bull Ratio (contrary indicator) remians cautionary as bulls are swamping bears at 16.2/60.0.
- In conclusion, with the charts mixed signals increasing, the fact that the forward valuation of the SPX based on forward 12 month earnings estimates from Bloomberg is back at a 15 year high with an 18.5 forward multiple, margin debt is at historically extreme levels up 20.5% y/y and investment advisors entering levels of emotional complacency as seen by the Investors Intelligence Bear/Bull Ratio (contrary indicator) at 16.2/60.0, we remain of the opinion that a significant amount of downside risk is present in the markets currently versus potential reward.