Most Short Term Trends Neutral
Opinion: All of the indexes closed lower yesterday with the one exception of the COMPQX. Internals were negative on the NYSE as volumes rose from the prior session while the NASDAQ internals were mixed as its A/D was negative but up volume widely outpaced down volume. For the COMPQ, this suggests yet again that money is moving into fewer names with weakening breadth. The charts saw a couple of technical negatives while the data stays fairly benign. Yet our concerns of extended valuation, high levels of margin debt and advisor complacency persist. In aggregate, they suggest that risk outweighs reward for the near term.
- On the charts, the only index closing higher yesterday was the COMPQX (page 3) that occurred with a negative advance/decline. Technical weakening was seen on the DJI (page 2) closing below its short term uptrend line while the VALUA (page 5), that had done so the prior session, closed below near term support as well as its 50 DMA. Given the breadth of that index, it suggests an underlying weakening of general market breadth. The All Exchange cumulative A/D has turned negative along with that of the NASDAQ. We now find only the SPX (page 2) and DJI in short term uptrends with the rest of the indexes neutral.
- The data is too evenly balanced to be of great import. All of the McClellan OB/OS Oscillators are neutral (All Exchange:-35.66/+12.38 NYSER:-45.88/+25.88 NASDAQ:-26.95/+0.25) as are the Equity Put/Call Ratio (0.59) and Open Insider Buy/Sell Ratio (44.8). A mildly bullish 0.89 Total Put/Call Ratio is being counterbalanced by a very bearish OEX Put/Call Ratio as the pros a very long puts at 2.21 after having been neutral the past few sessions.
- In conclusion, while the charts and data that have typically been the meat of our analysis are not all that disturbing, we remain of the opinion that a high level of risk is present versus potential reward as the forward valuation of the SPX at an 18.2 multiple (0.1 from a decade high) combined with heavy margin exposure (up 20.5% y/y) and the Investors Intelligence Bear/Bull Ratio (contrary indicator) at 18.6/50.0 implying complacency on their part combine to suggest appreciable downside risk is present should an event occur that could cause a shift in sentiment. Such shifts are far from uncommon in market history. And when they happen with the above combination in place, the result can be far more impactful than one might otherwise expect.
- Forward 12 month earnings estimates for the SPX from IBES of $133..96 leave a 5.55 forward earnings yield on a 18.3 forward multiple, near a decade high.
SPX: 2,420/NA
DJI: 21,042/NA
COMPQX; 6,121/6,304
DJT: 9,160/9,487
MID: 1,715/NA
RTY: 1,392/1,419
VALUA: 5,447/5,550