Warning Signs Are Flashing, Proceed With Caution

 | Aug 16, 2017 | 9:35 AM EDT
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Yesterday was a mixed day for the indexes, with negative internals on the NYSE and Nasdaq, as NYSE volumes rose and Nasdaq volumes dipped from the previous day. There were no major technical events generated on the charts, so the mix of current short-term trends is still intact.

Although forward 12-month earnings estimates from Bloomberg have risen from $134.01 to $137.23, forward valuation remains near a decade high -- at 18x. Margin leverage is at extreme levels and investment advisors continue to display a high degree of complacency. So we continue to believe that risk is high versus potential reward, given current levels and concerns.

On the charts, the bifurcation of index performance continued yesterday. The Dow Jones Industrials and Dow Jones Transports were the only indexes that managed to close higher, but they did so on negative breath and up/down volume, as volumes rose on the NYSE.

The DJI closed at resistance, while the S&P 500 and Nasdaq Composite Index closed near resistance. All failed to violate. The weakness in the S&P Midcap 400 Index and Value Line Arithmetic Index brought them back below their 150-day moving averages. The near-term trends continue to show a disconnect, as the DJI is the only one in an uptrend, with the SPX and DJT neutral. The remaining indexes are still in near-term downtrends.


Valuation remains high, as do margin exposure and advisor complacency, given current readings. We continue to view market risk as high versus potential reward.

Forward 12-month earnings estimates for the SPX from Bloomberg of $137.23 leave a 5.56% forward earnings yield on an 18x forward multiple, near a decade high.


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