With All These Bulls Milling About, It Could Lead to a Stampede

 | Jan 11, 2017 | 9:40 AM EST
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The bulk of the indexes closed higher yesterday, with the exception of the Dow Jones Industrials (DJI). Internals were positive on both exchanges, as volumes rose on the NYSE and fell on the Nasdaq. The Nasdaq Composite Index (COMPQX) made a new closing high, while most of the indexes remain in their sideways patterns, which have been in force since mid-December.

The data remains largely neutral, with a couple of cautionary signals. And given the state of the charts and data, we have yet to see a sufficient shift in the weight of the evidence to alter our near-term "neutral" outlook for the major equity indexes, in spite of some concerns. Extended valuation of the S&P 500 Index (SPX) at historic highs keeps our intermediate-term view "neutral," as well.

On the charts, all but the DJI closed higher yesterday, with the COMPQX making another new closing high. But most of the large-cap indexes closed near their intraday lows, giving up earlier session gains. While not actionable at this point, the SPX flashed a "bearish stochastic crossover" signal. As such, the short-term trends of the various indexes remain intact with only the COMPQX in an uptrend.

The rest of the indexes are neutral while the Dow Jones Transports (DJT) remains in a short-term downtrend at this point in time. Only the COMPQX has made measurable progress over the past month. The Volatile Index (VIX) remains near its 12-month lows, suggesting the potential for some volatility to reenter the markets.

The data remains largely neutral, including all of the McClellan OB/OS Oscillators (All Exchange:+4.46/+15.2 NYSE:+18.35/+28.84 Nasdaq:+2.95/+1.54). The Equity Put/Call Ratio (contrary indicator) is also neutral, at 0.64. On the other hand, the OEX Put/Call Ratio (smart money) finds the pros heavy in puts, at 1.86, and expecting some near-term weakness.

As mentioned in recent reports, we remain concerned about the extent of investor bullish sentiment, as indicated in the AAII Bear/Bull Ratio, at 25.23/46.2, and the Investors Intelligence Bear/Bull Ratio, at 18.4/60.2. Both of these contrary indicators show a high degree of complacency on the part of the crowd, in our opinion. While no sell signals have been generated on the charts, having too many bulls may prove to be problematic when their attitude shifts.

In conclusion, while we do have some concerns in the near term, until sell signals are generated on the charts, we are forced to continue with our near-term "neutral" outlook for the major equity indexes.

Forward 12-month earnings estimates for the SPX from IBES of $130.93 leave a 5.75% forward earnings yield on a 17.3x forward multiple, a 12-year high.

 

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