dancing diva

5 Reasons Why the Market Is About to Change Direction

This article was clearly written prior to the breakout on Wednesday/Thursday. And while it needs confirmation since volume was light, the author looks like he's leaning the wrong way.

Is it only me? I get angry when a technician starts talking fundamentals. Two fundamentalists can have vastly different opinions but the best technicians are deaf, dumb and blind to the news around them. Everyone these days is climbing a wall of worry and it's easy to get bearish looking at the headlines. But a chart is a compilation of all opinions and ultimately rules - at least in the short term.

Leading Economic Indicator Isn't Indicating the Real Recovery

Another excellent example of "lies, damn lies, and statistics". I have been suspicious for the past several months regarding the LEI. Since it uses money supply but completely ignores the velocity of money, which has been shrinking, it paints a false picture of potential economic growth.

S&P 500: Which Earnings Are Most Relevant to Its Performance?

Tom,
Thanks for your reply.

While I would normally agree lower interest rates would significantly boost the S&P, as they have done historically, I really do think this time it's different. That's because banks are still not lending freely and credit is tight, despite the low interest rates. In the past the low level of interest rates ( which implies easy credit conditions) are bullish for the stock market because it allows busineses to expand freely. That's certainly not the case this time.

The reason I suggested the line should be shifted downward (and a dummy variable used for the clearly outlying data points such as near the 2000 stock market peak) that at least in the next 10-20 years it's doubtful that p/e's will get that stupidly high. Those data points shift the regression line up considerably.

Using the unemployment rates makes sense to me. Typically p/e's are highest during trough earnings, and trough earnings correlate well (with some time adjustment) to the highest rates of unemployment.

What if It Is a 'V' Recovery?

Thank you for an excellent article. While I'm also skeptical about a v-shape recovery, I'm keeping an open mind. Most encouraging is how many people think it can't happen.

S&P 500: Which Earnings Are Most Relevant to Its Performance?

I calculated the fair value of the S&P using your formula and the latest release of NIPA profits and came up with an S&P level of 1165. However, I noticed something rereading the article that I missed earlier. It related to your second graph and the regression.

Obviously the S&P was too highly valued in the 2000 (1999-2002?) period relative to NIPA profits and that shifts the line upward. You have these dates circled on the graph. What if you ran the correlation again using a dummy variable for the obvious outlyers (including those two below the line in graph 2 as well)? That would shift the regression equation line downward by ?. Just eyeballing it that could reduce the S&P fair value by at least 100 points, perhaps more.

Hopefully you will see this comment and reply. Thank you again for a great article.

Perhaps There Are Unseen Green Shoots

The Clusterstock chart - consumer debt as a % of GDP - I found surprising. Are you sure they didn't use nominal gdp rather than real gdp? The latter should yield a very different looking chart.

S&P 500: Which Earnings Are Most Relevant to Its Performance?

Very interesting, thought provoking article.

One comment/criticism. You are using twenty years of data for the correlation, and in that period credit became easier and tax policy better for the investor and corporations, with leverage also increasing.

Going forward that will certainly not be the case. If you can find longer history which includes more adverse conditions (credit, taxes, etc) and the correlation still holds - then you have a winner!

My gut says that the more adverse credit and tax situations should slow corporate profits and a market unwillingness to pay the multiples seen during that 20 year period you studied. Hence, the correlation should break down. But thanks for the heads up; I'll pay more attention to NIPA corporate profits in the future.

Have We Bottomed Yet?

You make too many blanket statements - especially being short or picking a top on energy stocks. There are many out there where valuations are still cheap, especially in the service sector.

Additionally, you suggest picking bottoms in beaten up stocks because you have no confidence in the stock markets bottom and think they would fall less? If you have no confidence, just stay out.

Remember, traders/investors who try to pick the top or bottom of the market are called heroes - because they are the first to perish.

PS - I am long crox (and have been buying it for the past three weeks), but on valuation. There are plenty of cheap plays around. Rather than this inane article, do you homework and don't waste our time with stupid generalities.

Stock Valuations On the Rise

Your P/E exercise is misleading and therefore worthless since it conveys the idea the stock market is expensive.

The s&p p/e is high because the "e" in both the financial and consumer discretionary areas have fallen, and these two sectors make up about 29% of the s&p (as of Sept 2007 although it's probably lower today). When one takes a look at the other sectors, where earnings are actually growing because they are heavily tied to the world export market, p/e's are not particularly high on a historical basis and in most cases are lower than a year ago. This was especially true before the latest rally.

New York Times Reports the Recession is Here: What a Shock!

I agree with you. There are plenty of bargains around that have started to bottom out.

I ascribe to the principles "when they're crying you should be buying" and "selling when they are yelling". I've been buying but plan to sell some call options on the next rally - just in case.

There are lots of tears flowing now. Perhaps someone should come up with a kleenex index as a way to interpret the bottom.

Technical No-No: S&P 500's 50-DMA Close to Crossing Below Its 200-DMA

So, out of the 36 crossovers, 19 were lower a month and a quarter later. That's little better than tossing a coin. And I should care about this? Did you even notice it seemed to work much better prior to 1970 than after? Perhaps, like everything else, when people "gamble on it" it doesn't pay off?

Did I Just See a Dead Cat Bounce?

Mr Ehrenberg - congratulations on spouting conventional wisdom. How about a little deeper thought?

No one denies there is a problem in either the credit market or the economy. In fact, the market had been voting with its pocketbook all month, with the downside accelerating after the Fed's statement "the risks are balanced". Well, you and I and everyone else except the Fed realized the risks were definitely not balanced. However, this weeks realization that the Rip Van Winkle Fed had finally woke up gave the market a reason to rally for the first time in a while. Like an alcoholic can't be cured until he acknowledges his dependency, neither can the economy be cured until the Fed realizes there is a problem.

Will the economy be cured by a 1/4 or 1/2 point rate cut? No. Will I short this market? No way! The reason is that most stocks are not overpriced and with the Fed working with rather than against the economy there is more hope for the future. Sentiment is far more important than the short term gdp level for the direction of the stock market.

Has Anything Really Changed in the Last Two Days?

You miss the point. The market bounced not because it thinks a 1/4 or 1/2 point will make a difference, but because the Fed finally acknowledged there was a problem. Only then can there be a solution. Prior to this week it looked like the Fed members were completely oblivious to the issues with both the credit markets and the economy.

The market needs a proactive Fed not a reactive Fed. This week gave the first glimmer of hope it will move in that direction. As long as this becomes a reality stocks will be well supported. You forget this is not like 2000 when the market multiple was nearly double the current level. There is no reason for a stock market collapse unless there is an economic one. And there will not be one if the Fed and US gov't do their jobs.