Uptrends Remain Intact

Valuation & Advisor Sentiment Troubling

Opinion

Most of the indexes closed lower yesterday with negative internals as volumes rose on the NYSE and declined on the NASDAQ from the prior session. No chart trends or support levels were violated. The data remains mixed, yielding no strong directional implications. As such, we maintain our near term “neutral/positive” short term outlook for the major equity indexes. Yet extended valuation and investment advisor sentiment continue to be troubling factors.

• On the charts, all of the indexes closed lower yesterday with the exception of the DJI (page 2) inching higher to another new closing high. However, breadth and up/down volumes were negative on both exchanges, taking some shine off of the DJI’s achievement. In spite of the declines, there were no violations of any of the short term uptrend lines or support levels on any of the indexes. As such, no technical sell signals were generated. At this point, the charts remain positive.

• The data remains mixed. All of the McClellan OB/OS Oscillators, with the exception of the NYSE 21 day being slightly overbought, are neutral (All Exchange:+34.48/+44.66 NYSE:+16.52/+54.6 NASDAQ:+34.99/+31.16). The put/call ratios are at odds with the Total and OEX Put/Call Ratios sending slightly bullish messages at 0.89 and 095 respectively while the Equity Put/Call Ratio (contrary indicator) finds the crowd heavy in calls at .54. The Gambill Insider Buy/Sell Ratio remains a neutral 10.0.

• However, there are two factors that keep our enthusiasm in check. Forward valuation of the SPX based on 12 month forward IBES earnings estimates is at a 12 year high at a 17.7 multiple. Stocks are the most expensive they have been in over a decade. In addition, investment advisor sentiment is excessively bullish as measured by the Investors Intelligence Bear/Bull Ratio (contrary indicator) at 17.6/61.8. This combination of high valuation and advisor complacency suggests to us that, should the markets experience a “bump in the road”, the shock absorbers are weak and may find it more difficult to handle than would otherwise be expected.

• In conclusion, while the charts and data remain “neutral/positive”, as does our near term outlook, there are other factors at work that suggest some caution is advisable regarding expectations.
• Forward 12-month earnings estimates for the SPX from IBES of $132.33 leave a 5.6 forward earnings yield on a 17.7 forward multiple, a decade high.
• SPX: 2,277/NA
• DJI: 19,946/NA
• Nasdaq: 5,576/NA
• DJT: 9,141/NA
• MID: 1,697/NA
• RTY: 1,377/1,357
• VALUA: 5,387/NA