Uptrends Remain Intact
Guy S. Ortmann, CMT | Nov 26, 2014 10:30AM ET
Our next report will be Monday, December 1. The markets closed mixed yesterday leaving their respective uptrends intact. We would note that internals turned a bit questionable on both exchanges although possibly not enough to cause a shift in trend just yet. Sell signals on the charts remain elusive while, in our opinion, valuations have become stretched along with sentiment suggesting elevated near term risk exists.
- On the charts, the DJT (page 3) made another new closing high while the COMPQX (page 3) made a new 14 year closing high. The rest of the indexes closed lower although fractionally so. Their respective uptrends remain in place. However, the internal action was somewhat questionable. On the NYSE, advancers beat decliners but down volume surpassed up volume suggesting a possible weakening of demand. Meanwhile, the NASDAQ saw decliners slightly above advancers while up volume beat down volume. The weaker A/D for the COMPQX may also suggest waning demand. While the internals may seem to be minutia at this point, should it continue, it may prove more problematic. Most importantly, until we see sell signals on the actual charts, the uptrends should be respected.
- Our concerns remain regarding valuation and sentiment. With the First Call forward 12 month estimates slightly dropping again, this time to $127.71 from $127.82, the forward 12 month p/e based on these estimates is now at a 16.2 multiple that is a decade high. As well, the “crowd” measured by the Rydex Ratio (contrary indicator) shows the leveraged ETF traders at a decade peak of leveraged long exposure.
- In conclusion, while we believe we are at potentially dangerous levels of valuation and crowd bullishness, until the charts actually trigger sell signals, the markets may continue to become even more overvalued as money seems to think the markets can only go up.
- For the longer term, we remain bullish on equities as they remain comparatively undervalued with a 6.17% forward earnings yield for the SPX based on 12 month IBES forward earnings estimates of $127.71 versus the U.S. 10-Year yield of 2.26%.
- S&P 500: 2,030/?
- Dow 30: 17,609/?
- NASDAQ Composite: 4,654/?
- Dow Jones Transportation: 8,963/?
- S&P Midcap 400: 1,420/?
- Russell 2000: 1,155/1,186
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