Contributor since: 2012
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According to work of David Kostin from Goldman Sachs, the average forward PE since 1976 is 12.8. Even using your $105 earnings estimate (which I have no reason to debate) and that multiple of 12.8, fair value sits right around 1344.
John Hussman has done some estimates for longer term forward P/Es and finds that since 1948 the average forward P/E is closer to 11. IF Hussman (and yes, I know he has been classified as a perma-bear) is right, that would but fair value at 1155.
The 10 Year CAPE at north of 22 and at the very high end of its historical range (top quintile) and is consistent with below average returns over the next 10 years.
Long term average TTM PE is roughly 15 and we currently sit at roughly 17 by Birinyi calculations.
So I still see a market that is pretty overvalued here. While the market could certainly move higher as P/E ratios have little to do with short term price movements, they do significantly impact expectations for long term market returns.
I am actually not a "Fast Money" guy. I'd say more of a Rocket Scientist than a Rocket jockey. The name relates to the fact that I generally take a very deliberate scientific approach to investing.
As for a straddle in this scenario, it isn't a horrible option, although the cost of a straddle is likely pretty high here. I would prefer to use a strangle (same idea but using an OTM Call and PUT option) in this scenario.
That certainly could happen - I have an alternate count that is quite a bit more bullish, but I have harder time seeing it play out from a fundamental perspective. I have a fundamentally bearish bias but I trade based on a clearly defined system to keep my bias out of my account.
“Technical Analysis The Complete Resource for Financial Market Technicians” by Charles Kirkpatrick and Julie Dahlquist - is a pretty good book to start with. This book will give you a better than average understanding of TA. The Market Technicians Association ( is an organization dedicated to the practice that you may want to check out.
TA is a worthwhile endeavor, but can certainly be overwhelming for novice investor. I've found personally that it helps to focus on just one method of TA at a time.
You do not have to become a CMT to make money. You just need to find a system that you understand and that works and develop the discipline to follow it even when it goes against your gut feelings. Most importantly, you will need to employ effective money management (no system is 100% accurate and minimizing losses when it is wrong is one of the most important lessons a trader can learn).
Yes, great strategy - I've used it from time to time myself. Seeking Alpha Contributor Philip Davis, recommends this strategy often (if you can get past the political banter, his articles are worth reading). I primarily use a trend following approach and tend to stay fully invested in my trading accounts - on one side of the market or the other.
There are certainly opportunities to take market neutral positions, but I think that it is a difficult way to consistently make money over time. You have twice the trading cost to overcome, equity correlations are relatively high and you are only making the spread between the two positions.
Overall, I tend to be incredibly bearish in my fundamental outlook. However, I primarily use technical analysis when managing my money. I use a trend following strategy with a mean reversion overlay as it helps keep my bias out of my investment account.
Love the idea- It is essentially the "Fair Tax" plan pushed by John Linder (republican) and Neal Boortz (libertarian). If you haven't read their book already, it is worth a quick read. They also have a website -
See Phil can reach across the isle. :)
Interesting model - I just took a quick tour of the site and your most recent report. It looks like your 6 month expected return from March 2012 is roughly -10%. March S&P closed at 1408. So unless I am misunderstanding the model would anticipate a September close of roughly 1267 and move higher from there. This is not much different from the path that I have laid out in my article. Again I may be missing something but, it seems you have a positive expectation of return over the next 6 months, but a negative expectation over the next couple of months.
If you haven't worked with Elliott Waves before, they can certainly seem to be something akin witchcraft, but the reality is they work. Maybe it has to do with the number of people (or algos) who count and trade off of them or maybe it truly has to do with investor psychology as adherents claim, but when applied correctly it can give you an additional edge when trading. It, like any trading system, isn't perfect but I tend to like them because they are a predictive form of technical analysis and it helps me with more accurate entry points, stop losses and price projections.
If anyone is interested, the best free website that I have seen that practices EW is Jason Haver runs the website and has a great track record.
I can't see Fed QE being announced with the S&P and treasuries at current levels and a BLS report showing 163k jobs added. The employment numbers likely pushed off any QE for the time being. We are likely to see continued rumors of a bond buying program in Europe, but until the German consitutional court rules on September 12 on the ESM, I will look to fade European Hopium.
I'd be interested to see what indicators you are looking at that point to higher prices?? You have a series of higher highs and higher lows on the S&P (which is somewhat positive) but the Transports, Russell 2k, credit, CCI indicators, RSI indicators have not confirmed the move.
Timtrice was responding to a weakening IT trend near the top of the recent trading range and while the timing may not have been perfect, the thought process is sound. As long as a trader clearly defines the risk (generally with stops) in a way that is consistent with his risk tolerance, it can be consider a good trade even if the trade moves the wrong way.
The goal is not to win every trade. The goal is to identify good risk/reward set-ups, define a clear entry, exit and stop loss point, and NEVER put so much at risk that you can't sleep. If you follow that process you can be a profitable trader over time.
I would love to see your uber-bullish chart and how you define risk/reward at these levels. If you can convince me, I'd be glad to play long for a trade.
Lower Labor cost, Taxes and Interest Expense all contribute to abnormally high profit margins.
You might be right and lower total labor costs may persist in an era of improving technology and high unemployment. In an normal environment, higher labor costs would generally be consistent with higher sales as it would generally be the result of diminished supply of labor. However, unemployment among college graduates is under 4%. So the cost of skilled labor may actually rise substantially even though total employment remains weak due to the lack available of jobs for non-college educated individuals. Also the health care reform requires companies with more than 50 employees to provide health insurance for employees. This may also raise labor cost without a corresponding increase in sales. So we may see rising labor costs without an increase in sales.

Corporate Taxes are low (not the tax rate but those actually paid). Likely reforms to corporate tax law will raise the effective rate as lawmakers seek additional tax revenue.

Interest rates are at about the lowest in history. They certainly cannot fall much further. Rates may increase because the economy is expanding and inflation expectations are rising or they may rise with the perception of increased credit risk.

So - yes profit margins may stay wider than the historical norm for some period of time, but over a long enough period of time should revert to the norm.

Given the weakness in revenues and guidance over the last quarter and very wide profit margins, it will be tough for earnings to continue to grow at the pace that most analysts are projecting. As those analysts revise their earnings projections, we should see increased market volatility.
Not shorting America or even arguing that we see a complete market collapse. I actually believe in America over the longer term. I just think that the risk-reward here favors the bears.
Not a bad play, just make sure that you have stops in place. I prefer to buy put options on 3x bullish ETFs.
I'd never go short on valuations alone either. I use valuation and economic data to provide a background as I am looking at techinicals.
No system of determing valuation is perfect, but take a look at the Shiller PE in 1937 versus TTM PE -
1/1/37 Shiller PE = 21.61
1/1/37 TTM PE = 16.75
You could have used the similar justification in 1937 for not wanting to use prior 10 year data. The interest rate environment was also similar so you could have made the relative valuation case for equities as well. We saw a roughly 50% equity market decline to follow.
Valuations are not the sole driver of market performance, but there is a high correlation between 10 year equity returns and valuation at point of purchase. I choose to use Shiller PE because it smooths out the volatility in profit margins. Profit margins are at an all-time historical high and they have a tendency to mean revert. TTM P/E won't look nearly as attractive when the E drops.
See - I just about doubled my money on those DUST puts. I sold a little more than half and now am playing with house money.
Well - that is what investing/trading is about - there are no guarantees. I am taking a calculated and well defined risk on Gold Mining stocks. I am not suggesting that you should do the same. Technically, Gold Mining stocks are extremely oversold on there daily and weekly chart to a degree that is consistent with a large bounce. I am glad that GDX has trailed the SPX and GLD since last October. If it hadn't, it wouldn't be presenting with this opportunity. This is not a long term investment. This is a trade. I expect GLD and GDX to bounce here. It may be a dead-cat bounce in a larger downtrend, but I should still be able to pocket a nice profit if I am close on the timing. I purchased some DUST puts which I could have already traded out of at more than a 20% profit. I chose to hold onto the trade because I think that there is a lot more to be had.
This trade may fail. I don't expect to be profitable in all of my trades. I just need to win more than I lose and only take trades with an appropriate risk/reward level. This meets that criteria for me. If it isn't for you, don't take the trade - or you could even take the other side. That is what makes a market. I enjoy reading and sharing ideas on this forum as it helps ensure that I see both sides to the trade.
Yes, the GDX chart is broken. Yes I've heard the, "Don't catch a falling knife" bit, but I think that this trade pays big in the next month and I'm putting my money behind it. This isn't a recommendation for you or for anyone else. If I lose my money, I take responsibility for my decision and will hopefully learn something positve from it.
Ummm take a look at a chart of GDX - It did relatively well in each of the last two summers. It had a very rough 2008, but bottomed well before the broader market.
Yes, but a very different trade that will play out over a much longer time frame. The US needs low interest rates to effectively manage our debt. A rapid spike in interest rates would likely rock the economy, stocks and risk assets ultimately creating an environment where the FED will do QE and fear would send people back in to the safety of treasuries. The Fed and Fear would push those rates right back down. Many expected high interest rates on the back of the debt downgrade (including Bill Gross), but of course we didn't see it. I expect a much slower rise in interest rates than many of your bond bears - it will probably take a number of years. I will probably not trade it, just avoid fixed income as it has a lower expectation of return during the rise. Historically, from 1953-1970 interest rates move from roughly 2% on the 10Y UST to roughly 8%. Investments in those treasuries would have given you an average total return of 1.9%. Could you short bonds? Sure - you may even be able to make a few bucks- I just think you get better bang for your buck elsewhere.
Ultimately, yes the market can stay irrational much longer than most of us can stay solvent - blah, blah. However, GDX daily and weekly RSI moved into oversold territory. GLD daily RSI indicating oversold. These types of oversold conditions have typically led to relatively large bounces over the past few years (even during the 2008 sell-off). GDX should provide greater upside bounce than GLD due to the spread. I bought JUN 55 DUST PUTS today in the afternoon sell-off. I might end up being wrong (it wouldn't be the first time), but I see it as a pretty high probability payday. (not trading advice)
I think GDX is nearing a critical bottom. The GLD/GDX spread is incredibly wide. Troubles continue to brew in Europe, economic data is softening and more global QE is likely on the horizon. I will probably play this trade with DUST puts.
Only reason we would see positive payroll growth (which I doubt we will with +400k initial claims) is b/c of Gov't census hires which are temporary jobs and people giving up and exiting the workforce. This is tough for the bulls to color as positive.