Well, the panic has extended to the stock market. Its recent
descent has turned closer to vertical, but the reaction has not
been irrational. As discussed in the last update on fundamentals
on 9/23, the SP 500 Market Tracker had fallen to a value of 1025.
At that time, the SP 500 was trading at a whopping 17% premium
to this measure of fair value. Then, investors were looking at
80.0 annual earning power for the index vs. roughly 68.0 for the
12 months through 9/08. With a suddenly deepening downturn,
investors have lost confidence in the 80.0 number and have pushed
its realization further out in time.
All of my earnings indicators have been weakening as US production
has been falling as well as have industrial price realizations. This
suggests more earnings disappointments across an array of sectors.
On the plus side, my inflation thrust indicators have sunk rapidly,
so the Tracker p/e multiple will start to be adjusted upward. The
Tracker needs fresh data, but for now, I am going with roughly
1000 for the SP 500. So, I have the market now trading at fair
value, with no premium for a quick return up in earnings.
As outlined in the 10/4 technical look post, I am on the hook as
calling for a substantial and tradable rally to start sometime over
the next five trading days. That would befit the market's very
oversold position. This "call" is based on six week breadth
indicators that have proven reliable over the years. So, I'll go
with that. It won't be nearly as helpful a call if the rally comes
within the next five trading day timeframe but from much lower
levels. But, I'll take it anyway.
- Peter Richardson
- Retired chief investment officer and former NYSE firm partner with 50 plus years experience in field as analyst / economist, portfolio manager / trader, and CIO who has superb track record with multi $billion equities and fixed income portfolios. Advanced degrees, CFA. Having done much professional writing as a young guy, I now have a cryptic style. 40 years down on and around The Street confirms: CAVEAT EMPTOR IN SPADES !!!