Near-Term Forecast: More Chop With Growing Valuation-Gap Clouds Overhead

The data dashboard is sending mixed signals as we close out the week, but what is clear is the forward valuation of the S&P 500 for price-to-earnings is still very extended above ballpark fair value.

This means that more sideways chop is in the forecast.

All the major equity indexes closed lower Thursday with negative New York Stock Exchange and Nasdaq internals. NYSE volumes dipped and Nasdaq volumes rose from the prior session. Most closed near the midpoint of their intraday ranges that did not create any technical events and their near-term trends remain a mix of bullish, neutral and bearish forecasts, while cumulative market breadth is generally poor. 

Charts and Technicals

• The charts remain bullish for the S&P, Dow Jones industrial average, Nasdaq and Nasdaq 100. The Dow Jones Transports and mid-caps are neutral with the small-cap Russell 2000 staying bearish.

• Cumulative market breadth is a concern as the advance/decline lines for the All Exchange and Nasdaq remain bearish with the NYSE’s neutral.
• Some of the stochastic levels are overbought but no bearish crossover signals have been registered thus far.

• The one-day McClellan overbought/oversold Oscillators are oversold for the All Exchange and NYSE with the Nasdaq’s stayed neutral (All Exchange: -50.1; NYSE: -63.9; Nasdaq: -43.04).
• The percentage of S&P 500 issues trading above their 50-day moving averages, a contrarian indicator, dipped to 69% staying neutral.
• The detrended Rydex Ratio, a contrarian indicator, however, rose to 1.06 and was still on a bearish signal.
• The Open Insider Buy/Sell Ratio rose slightly, but remains bearish at 23.8 as they have been sellers of late.
• This week’s American Association of Individual Investors Bear/Bull Ratio, another contrarian indicator, is unchanged at a neutral 0.58.
• The Investors Intelligence Bear/Bull Ratio, another contrary indicator, also remained neutral and unchanged at 22.6/52.5.
• Finally, valuation remains a concern. The 12-month consensus earnings estimate for the S&P from Bloomberg dropped further to $255.73, leaving its forward price-to-earnings to 22.6 and at its highest level above the “rule of 20” ballpark fair value in several weeks at 15.9. We believe this premium still presents some risk.
• Its earnings yield is 4.42%.

Treasury and the Buck

The 10-year Treasury yield rose to 4.1% and above resistance. Support is 3.81% with new resistance at 4.11%. Its near-term trend is bullish. The U.S. Dollar, via the Dollar Index Bullish exchange-traded fund closed lower at $28.81. Its trend is bullish with support at $28.70 and resistance at $28.83.

The Bottom Line

We see further sideways chop for the major equity indexes. We remain patient and buyers on weakness near high volume support levels in names that meet our fundamental/technical criteria.