Some Charts See Improvements

SPX Forward Earnings Estimates Slip

Opinion

All of the indexes closed higher yesterday with positive internals as volumes rose slightly from the prior session on the NYSE and NASDAQ. Several charts saw some technical improvements while the data remains largely neutral in nature. However, IBES forward 12 month earnings estimates for the SPX have slipped to $132.89 leaving forward valuation of the SPX back near historic highs. As well and in spite of the technical improvements, the chart pictures generally continue to display what we view as potential topping formations, with one exception. Thus we are maintaining our near term “negative” outlook for the major equity indexes as a whole.

• On the charts, all of the indexes rose yesterday with the SPX (page 2) closing above resistance but remaining in its short term downtrend as is the DJI (page 2). The COMPQX (page 3) also closed above resistance to a new closing high and remains the only index chart in a short term uptrend. Both the DJT (page 3) and VALUA (page 5) closed above resistance as well with the DJT closing back above its intermediate term uptrend line. Their trends are now neutral. The MID (page 4) and RTY (page 4) closed above their 50 DMAs and short term downtrend lines and are also now in near term neutral trends. As such the near term trends for the indexes are now a mixed bag.

• However, we want to take a look at the SPY (NYSE:SPY) chart (page 9) that may offer some clues. As can be seen on the chart, the SPY which we believe is a major recipient of investment funds remains in a short term downtrend having rallied back to resistance as volumes have steadily declined over the past 4-day advance. Such rallies to resistance on weaker volume can portend exhaustion of a longer term uptrend. Violations of resistance and the downtrend would need to be achieved on strong volume to alter that scenario.

• The data remains largely neutral including all of the McClellan OB/OS Oscillators (All Exchange:+41.29/-8.54 NYSE:+49.13/-4.09 NASDAQ:+42.92/-14.36). The Total and OEX Put/Call Ratios are the only positive signals at 0.94 and 0.56 respectively.

• Finally, IBES has reduced their forward 12 month earnings estimates for the SPX from $133.07 to $132.89 leaving forward valuation of the SPX near its decade high. So, in spite of the chart gains, we remain near term “negative” in our outlook for the major equity indexes.
• Forward 12-month earnings estimates for the SPX from IBES of $132.89 leave a 5.61 forward earnings yield on a 17.8 forward multiple, near a decade high.
• SPX: 2,342/2,373
• DJI: 20,109/20,865
• Nasdaq: 5,795/NA
• DJT: 8,906/9,283
• MID: 1,687/1,728
• Russell: 1,338/1,384
• VALUA: 5,331/5,477

Some Charts See Improvements

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Written By: Guy S. Ortmann, CMT