Despite Rocky Ride, This Metric Says the Stock Market Is Not Overvalued

 | Mar 21, 2018 | 10:07 AM EDT
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While the markets have had a bit of a rough ride lately, especially in some high-visibility names, our discipline of using the charts and data suggests we maintain our near-term "neutral" outlook at this stage.

Let's explain all the reasons why.

Valuation is less of a concern as the forward P/E for the S&P 500 based on 12-month forward consensus estimates stands at a 17.2x multiple. The "rule of 20" suggests fair market value can be roughly established by subtracting the 10-year Treasury yield from 20, in this case yielding a 17.2 xmultiple as well. By this measure the markets are not overvalued.

Most of the indices closed higher Tuesday although internals were negative on both the NYSE and NASDAQ as volumes declined from the prior session. No major technical events occurred on the charts, leaving their near-term trends a mix of neutral and negative.

Source: Bloomberg

On the charts, most of the indices closed higher Tuesday with the exceptions of the Russell 2000 (see above) and Value Line Arithmetic Index. However, the gains on the other indices occurred on negative internal breadth and up/down volume.

No support or resistance levels were violated, leaving the S&P 500 (see below), Dow Jones Industrial Average, Nasdaq Composite and Nasdaq 100 in short term downtrends. The rest of the indices are in sideways consolidation patterns, in our opinion. And while the cumulative advance/decline lines for the All Exchange, NYSE and NASDAQ are short-term negative, they all remain above their 50-day moving averages.

Source: Worden

The data is mostly neutral, including all of the McClellan OB/OS Oscillators (All Exchange:-25.34/+10.77 NYSE:-30.63/+10.9 NASDAQ:-22.08/+14.07). The Equity and Total Put/Call Ratios are also neutral at 0.68 and 0.84, respectively as is the OpenInsider Buy/Sell Ratio (34.1).

One bullish signal is coming from the OEX Put/Call Ratio as the pros have switched their prior bearish put exposure to now being long calls at 0.63. Also, while remaining neutral, the new AAII Bear/Bull Ratio (contrary indicator) at 29.0/28.0 shows bears outweighing bulls for the first time in several weeks, suggesting the "wall of worry" is being rebuilt.

Forward 12-month earnings estimates for the S&P 500 from Bloomberg are $157.61 per share leaving a 5.8% forward earnings yield on a 17.2x forward P/E multiple.

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