Currently, the P/E ratio average for the S&P 500 stocks is approximately 15. That's around the historic average. Then why many stocks look so cheap?
It depends where we look at. The financial and basic material sectors have suffered a lot of pain, while that's not the case for other sectors...
The stock market performance for the past 12 months shows an impressive symmetry when segregated by sectors, which shows that the "risk-on"/"risk-off" portfolio approach within the stock market is flowing in accordance with the main "stocks or bonds" theme. Defensive sectors have performed better. That can be seen on the Utilities Select Sector SPDR ETF (NYSEARCA:XLU), the Consumer Staples Select Sector SPDR ETF (NYSEARCA:XLP) and the Health Care Select Sector SPDR ETF(NYSEARCA:XLV), which are positive for the 12 trailing months.
From a contrarian standpoint, I'm confident that the bulls will start to take command in some industries inside the basic materials sector sometime within the next 6 to 12 months. The bleeding has been intense for some. The "poster child" for the oversold community is the mining industry. Rising capital expenditures mixed with an industrial downturn have left the mining stocks in ruins. Check the Dow Jones US Mining Index ($DJUSMG) compared to the Dow Jones Industrial Average Index ($INDU) as a ratio below...
The mining industry has been going down faster than the downward velocity of the Dow Jones for a long time. The SPDR Dow Jones Industrial Average ETF (NYSEARCA:DIA) can be used for the ratio too.
The SPDR S&P Oil & Gas Exploration & Production ETF (NYSEARCA:XOP) shows that the oil industry has been punished too and is surely filled with good opportunities. The accelerated recovery that the oil barrel price experiences when the markets turn bullish, the contango and the OPEC supply control, they all make the oversold oil stocks an excellent choice in my opinion.
Good old giants like McDonald's (NYSE:MCD), Apple (NASDAQ:AAPL), Microsoft (NASDAQ:MSFT) and Intel (NASDAQ:INTC) will surely receive a lot of attention when the markets turn around, along with any quality company with a good balance sheet that offers a good dividend.
We should be close to the climax in this drama and the stock market should find its bottom this summer. I think we will be in better shape by the time Santa is cleaning the chimneys with his big belly. By then, the chupacabra should have disappeared like he always does, at least for a little while. I currently have a medium to long term investment horizon (6 months +) and I'm buying undervalued stocks on the dips.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.