It was mentioned in a 6/10 post on the SPX that since the market held the shorter term shelf
of support at 2080, it might be worthwhile to see how it performed given widespread bearish
sentiment on both technical and fundamental grounds. The SPX has rallied enough off of
2080 support to turn the 25 day m/a positive, so it continues to require added attention given
the surprise move relative to sentiment. SPX
Key indicators of SPX behavior continue to show decelerating price momentum and recent
rallies that have tended to sputter out in mildly fitful fashion. Many strategists and other close
observers believe it is high time for a healthy correction. May be so, but it is also clear that
there exists a steadfast cadre of players who argue that the economy is progressing, that
weakness in SPX net per share is but temporary, and that a premium p/e ratio is well warranted
given prospects for a continuation of an extended period of low inflation and interest rates.
Newer players to the game may not be aware of the sway that this thesis of support for higher
and rising p/e ratios held in the market of the 1960s and very early 1970s. The view is often
encapsulated by the "Rule of 20", which claims that SPX p/e = 20 - the 12 month inflation
rate. With inflation very low and interests rates non - threatening, players who support this
idea see the market as reasonably priced.
I have issues with the "Rule of 20". Mostly, I am concerned that the rule should be based on
a longer view of inflation potential where there is considerably more room for debate than with
short run inflation measures.
Just know now that the "Rule of 20" is in vogue currently and has yet to be defeated by the
facts on the ground.
- 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 !!!