We Are Still Cautious, Despite Adviser Optimism

 | Jun 16, 2017 | 10:17 AM EDT
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Most of the indexes closed lower yesterday with the exception of the Dow Jones Transports. Internals were negative on the NYSE and Nasdaq, as volumes declined from the prior session on both exchanges. The news of the President coming under investigation did not result in any downside breaks below support levels on the charts. None of the near term trends were violated either.

The data is mixed, but with a couple of encouraging signals. Yet with all this said, we remain cautious -- our concerns regarding high valuation, advisor complacency and high margin levels are unabated.

On the charts, the only index closing higher yesterday was the Dow Jones Transports. While the rest declined, no support levels or trend lines were broken, leaving all but the Nasdaq Composite Index in near term uptrends -- the COMPQX is neutral. All managed to close near their intraday highs from the notable morning weakness. So all looks well in "Mudville," from that perspective.

Yet there is one chart that may be a cause for concern. Hays Advisory published a chart yesterday from FactSet on the level of short interest on the iPath S&P 500 VIX Short-Term Futures ETN  (VXX) . It shows that short interest on expectations of greater volatility has gone parabolic to an all-time high. These are extremely heavy bets that market volatility will remain low, easing the path for higher market prices. Our concern is that such an extreme level of short interest could be very problematic for the markets, should volatility rise, resulting in a short squeeze on the VXX.

All of the McClellan OB/OS Oscillators are still neutral (All Exchange:-10.01/+24.8; NYSE:-5.26/+44.01; Nasdaq:-15.66/+7.72), as is the Open Insider Buy/Sell Ratio at 37.1. The Put/Call Ratios are on bullish signals, as the Total and Equity P/Cs indicate the crowd is moving to puts -- at 0.98 and 0.8, respectively -- while the pros, measured by the OEX P/C, are still long calls at 0.89.

We continued to be concerned that the forward price-to-earnings ratio for the SPX is back up to an 18.2x forward multiple, the highest valuation we've seen by that metric in over a decade. Investment advisors, as measured by the Investors Intelligence Bear/Bull Ratio (contrary indicator), are near peak levels of market optimism, at 19.4/63.6, suggesting an almost-euphoric attitude. Finally, the use of margin to achieve performance has expanded by 20.5% on a year-on-year basis. In combination, they suggest real downside risk is present. Thus we are maintaining our cautious "negative" near term outlook in place.

Forward 12 month earnings estimates for the SPX from IBES of $133..96 leave a 5.55 forward earnings yield on a 18.2 forward multiple, near a decade high.



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