Investor Sentiment Overly Bullish at High Valuations
The major equity indexes closed higher Tuesday with positive internals on the NYSE while the NASDAQ saw positive breadth but negative up/down volume. Overall trading volumes declined from the prior negative session. Three of the indexes made new all-time closing highs while one bearish stochastic crossover was generated. Near -term chart trends remain split between neutral and bullish, while the data is currently a mix of neutral and negative readings. Our primary concerns are what appears to be overly bullish sentiment on the part of investors as insiders have been selling while valuation continues to be extended as well. They are the primary reasons for our current “neutral” outlook for the equity markets.
On the charts, the major equity indexes closed higher yesterday with positive NYSE internals and mixed internals on the NASDAQ as trading volumes shrank.
- Positive developments were seen on the SPX (page 2), COMPQX (page 3) and NDX (page 3 as all made new all-time closing highs.
- A minor negative appeared on the MID (page 4) as it generated a bearish stochastic crossover signal. Said signal would become actionable only if support is violated on a closing basis, in our opinion.
- Regarding trend, the SPX, COMPQX and NDX remain bullish with the rest currently neutral. Some uptrends have recently been violated but support levels have held.
- Breadth remains positive with the All Exchange NYSE and NASDAQ cumulative advance/decline lines positive and above their 50 DMAs.
On the data, the 1-day McClellan OB/OS Oscillators are still neutral despite yesterday’s gains (All Exchange: +39.48 NYSE: +38.81 NASDAQ: +38.96).
- The Open Insider Buy/Sell Ratio (page 9) remains in neutral territory but dropped to 26.4 and near bearish levels as insiders have lately been fairly consistent with selling transactions.
- On the other hand, the detrended Rydex Ratio (contrarian indicator) remains bearish at 1.47 as the leveraged ETF traders are heavily leveraged long.
- As well, this week’s Investors Intelligence Bear/Bull Ratio (contrary indicator page 9) saw another decline in bearish advisors as bullish sentiment increased and remains in bearish territory at 17.2/64.6. As stated yesterday investor sentiment appears to be overly bullish with the markets at new highs.
- When the valuation gap is added and remains extended with the SPX forward multiple of 23.0 with consensus forward 12-month earnings estimates from Bloomberg of $159.46 while the “rule of 20” finds fair value at 19.1, said sentiment could quickly shift to the other side of the boat.
- The SPX forward earnings yield is 4.35% with the 10-year Treasury yield lifting to 0.93%.
In conclusion, the charts remain generally constructive. However, investor sentiment and valuation both appear cautionary and are the primary reasons for our maintaining our near-term “neutral” outlook for the equity markets.
SPX: 3,620/NA
DJI: HVS29,215/30,100
COMPQX: HVS11,905/NA
NDX: HVS11,990/NA
DJT: 12,308/12,677
MID: 2,118/NA
RTY: 1,700/1,850
VALUA: 7,298/NA