Insiders Are Heading for the Exits In Droves

 | Mar 01, 2017 | 9:50 AM EST
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All of the indexes closed lower yesterday, with negative internals on the NYSE and Nasdaq as volumes rose notably -- implying institutional distribution. No important technical events occurred on the charts, leaving the mix of neutral and positive short-term trends intact.

The data remains largely neutral, as well. But we are still concerned about historically high valuation of the S&P 500 Index (SPX), along with excessively bullish crowd sentiment, while insiders intensify their selling activity. We are maintaining our "neutral/negative" near-term outlook for the major equity indexes, as we view the current risk/reward scenario as less than appealing.

The surge in volume on the charts suggests possible institutional distribution. While no support levels or trend lines were violated, the S&P Midcap 400 Index yielded a bearish stochastic crossover signal, which would become actionable should the MID violate support. The Russell 2000 Index closed on support, but failed to violate. So the SPX and Dow Jones Industrials remain in short-term uptrends, while the rest are neutral.

The data remains mixed -- but mostly neutral. All of the McClellan OB/OS Oscillators are neutral (All Exchange:-11.52/+31.52; NYSE:-15.89/+49.2; Nasdaq:-34.92/+11.79) as is the OEX Put/Call Ratio at 1.34. But the Gambill Insider Buy/Sell Ratio sits at 7.2, which is bearish, as insiders intensify their selling. By some accounts, selling was at a six-year high in the month of February, at $7.8 billion.

In conclusion, although there are no major sell signals on the charts at this point, the combination of the forward 12-month valuation of the SPX at a 17.9x multiple, along with excessively bullish crowd sentiment and insiders eagerly heading to the exits -- at the heaviest level in six years -- suggests to us that the potential for a sudden and meaningful market retracement is present. As such, we find the current risk/reward less than thrilling, leaving our near-term "neutral/negative" outlook intact. Should the charts break, we would increase our caution.

Forward 12-month earnings estimates for the SPX from IBES of $132.21 leave a 5.57% forward earnings yield on a 17.9x forward multiple, a decade high.


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