Little Impact From Yesterday’s Trade

There was very little in the way of notable events as a result of yesterday’s trade. Most of the indexes closed slightly higher on generally positive internals while volumes declined again. There were a few more minor signals generated that continue to keep us cautious for the near to intermediate term.

• On the charts, there is little to report regarding any changes. Most of the indexes closed a bit higher with the exception of the DJT that tested its 50 DMA and support for the second consecutive day. All of the prior signals and supports discussed yesterday remain intact with the exception of the COMPQX that joined the other indexes in triggering a bearish stochastic crossover signal. However, unless the COMPQX violates its short term uptrend line, the crossover is of little consequence.
• The data is essentially neutral including all of the McClellan OB/OS Oscillators (NYSE:-15.9/+33.21 NASDAQ:+0.57/+30.21). At present the only new warning sign is coming from the OEX Put/Call Ratio (smart money) that shows the pros once again loading up on pts at 1.83 and expecting some near term weakness. The new AAII Bear/Bull Ratio (contrary indicator) still shows the crowd to be overly bullish at 23.36/39.8 although moderating slightly from last week’s reading.

• Our primary concerns for the markets continue to center around valuation as sliding forward estimates for the SPX result in the index being the most expensive it has been in a decade at 17.3X while “crowd” sentiment remains at cautionary levels of bullish expectations. Historically, expensive markets combined with lofty crowd expectations have resulted in notable market corrections. We have been signing this song for the past several weeks with no response from the indexes. Nonetheless, we remain of the opinion that market history tends to repeat itself, especially given the current setup, and, as such, potential risk outweighs potential reward for the near and intermediate terms. What catalyst may trigger the shift is unknown. However, such “surprises” are the things corrections are made of.

• For the longer term, we remain bullish on equities as they remain comparatively undervalued with a 5.79% forward earnings yield for the SPX based on 12 month IBES forward earnings estimates of $121.71 versus the U.S. 10-Year yield of 2.11%.
• S&P 500: 2,063/?
• Dow Jones 30: 17,861/?
• NASDAQ Composite; 4,813/?
• Dow Jones Transportation: 8,877/9,236
• S&P Midcap 400: 1,474/?
• Russell 2000: 1,219/?

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Written By: Guy S. Ortmann, CMT