“Rule of 20” Suggests SPX Slightly Undervalued
Opinion: The indexes closed mostly lower yesterday with mixed internals on the NYSE while NASDAQ internals remained negative. No technical events of import were registered. The data is unavailable this morning but we suspect it is little changed from yesterday’s levels given Wednesday’s market action. As such, while the near term chart trends remain negative, we remain of the opinion that some relief for the indexes may be close at hand given the historic stochastic levels discussed recently as well as the data readings and valuation. However, resistance levels will likely need to be broken in order to alter our current near term “neutral” outlook for the major equity indexes.
- On the charts, most of the indexes closed lower yesterday with the exceptions of the MID (page 4) and DJT (page 4) closing slightly higher. Internals were mixed on the NYSE with positive breadth but slightly negative up/down volumes. NASDAQ internals remained negative. All of the charts remain in short term downtrends and below their 50 DMAs as do the cumulative advance/decline lines for the All Exchange, NYSE and NASDAQ. Yet some positive expectations may be derived from the stochastic levels discussed over the past few days that have historical prescience of occurring just prior to rallies on a very consistent basis over the past 12 months. The DJI (page 2), in fact, gave a bullish stochastic crossover signal as of yesterday’s close.
- The data is unavailable but given yesterday’s action, it is likely little changed with the McClellan OB/OS Oscillators possibly a bit more oversold. We would also reiterate the pickup in insider buying during the recent correction as the OpenIsider Buy/sell Ratio, while still neutral, has doubled from 34 to 68.
- As well, it is of interest that the “rule of 20” is now suggesting the SPX is slightly undervalued. The rule theory is that a ballpark fair value for a SPX forward 12 month multiple is equal to 20 minus the yield on the 10 year Treasury. In this case, the result is a 17.2 multiple. However, the actual current forward multiple is now slightly below that level at 16.5.
- In conclusion, today is the end of Q1. We suspect portfolio managers may not be eager to show exposure to stocks that have suffered of late on their quarterly statements, thus possibly delaying any meaningful rally as implied by the issues discussed above. Nonetheless, we still expect some bounce but remain near term “neutral” in our official opinion.
- Forward 12 month earnings estimates for the SPX from Bloomberg are $157.69 leaving a 6.0% forward earnings yield on a 16.5 forward multiple.
SPX: 2,581/2,693
DJI: 23,487/24,634
COMPQX; 6,958/7,324
NDX: 6,430/6,754
DJT: 10,125/10,571
MID: 1,890/1,902
RTY: 1,494/1,555
VALUA: 5,889//6,038