All of the indexes closed higher yesterday, with modest gains and positive internals. Volumes were above the prior session, but remain low during the holiday week sessions. One index made a new closing high while the rest remain in their short-term sideways patterns, with the majority of the data in the neutral camp. With little change in the weight of the evidence, we are maintaining our short-term "neutral" outlook for the major equity indexes. Historically high forward valuation of the SPX keeps the intermediate-term view also "neutral."
One positive technical event occurred as the Nasdaq Composite (COMPQX) made a new closing high. But the chart shows resistance was not violated. The futures this morning suggest that violation could happen, but the close will be the ultimate judge.
All of the other indexes remain in their current sideways trading patterns after breaking below their short-term uptrend lines last week. How these sideways patterns will resolve has yet to be seen. They may be catching their breath before resuming prior uptrends. However, the very low Volatility Index readings and the degree to which these indexes are extended above their 50-day moving averages warrants some tempering of enthusiasm, in our opinion.
The majority of the data remains neutral as well, including all of the McClellan OB/OS Oscillators (All Exchange:+15.01/+26.32 NYSE:+25.77/+35.86 Nasdaq:+14.66/+17.92). The Equity Put/Call Ratio (0.62) and Gambill Insider Buy/Sell Ratio (9.7) are also neutral. Contradictory signals are coming from a very bearish Rydex Ratio (contrary indicator) of 74.0, a decade high of leveraged ETF long exposure and a mildly bullish OEX Put/Call Ratio (smart money) of 0.92, as the pros are slightly weighted to calls.
In conclusion, we have yet to see enough of a shift in the evidence to warrant a change in our short term "neutral" expectations for the major equity indexes, while the SPX is historically expensive on a forward P/E basis.
Forward 12-month earnings estimates for the SPX from IBES of $131.02 leave a 5.79% forward earnings yield on a 17.3x forward multiple, a 12-year high.