After Last Week, S&P 500 Bottom Should be in Place

I have been looking at this market with a bullish bias because I believe stocks are cheap compared to the alternatives.

The S&P is expected to earn 95.54 in 2007 according to the bottom-up analyst consensus (.xls file). This gives the index a yield of 7.7% (95.54/1246) which is almost 3% greater then the 10-yr treasury.

Credit spreads and a flat yield curve indicate relatively little risk right now, so for the market to have a 3% risk premium over bonds is just ridiculous! In addition there are more companies beating analyst estimates then not, so the 3% difference may turn out to be understated.

In the short term I believe we put in a bottom this past week, because the indices have fallen more then 2 std deviations from their 20 day MA which is normally an aberration and for the hour ending 11:30am (Thursday), we hit a new multi-month low but closed at the highs of that period on a volume spike. Which could very well indicate a bottom in place.

S & P 500 bottom chart: