Originally Posted by neetanddave
Hey Laurie, I have a question from the "uneducated" side...
I noticed in the USAToday Markets section they break down the "most active" stocks daily. I noticed that there were some strange ones like a Polish potash company among them, but for the most part it was people selling off shares in banks and mutual funds.
Now that we've got a big jump today, I see more of the baseline stocks going up: Coca Cola, PG, HP. But there's upward movement in the financial sector as well: Goldman/Sachs, Merrill Lynch.
What does that mean for us regular people? I have no clue.
I don't really understand what you're asking. However, I doubt I have the answer as I'm not a technical analyst. Technical analysts pay attention to volume, moving averages (over differing periods of time), measures of volatility, various measures of momentum, etc. Gary does some long term technical analyses of market indices, not individual stocks. But I'm a fundamental analyst, and I look at stuff like the companies' earnings, returns on equity and assets, operating margins, stuff like that.
But if your question is - is the rally sustainable, my answer is - not long term. We put out a note last night that given the news out of Europe (very aggressive actions to "restart" the credit markets, notably, guaranteeing interbank lending) that we could see a "melt-up" today given the rapidity of the recent decimation. Unfortunately, on a value basis using long-term measures, the recent market melt-down merely brought us back to long term valuation averages. When bubbles burst, they tend to cause "over-corrections" - when the tech bubble burst, the sector was down 78% before it hit bottom.
While things are VERY different now than in 1929 - 1932, the markets then fell 91%, but it was over a 3-year period. The dissemination of news is much faster now, and the governments are far more proactive.
But basically, from they way we look at things, the market corrected - it didn't over-correct. And we're still dealing with being in a recession - and come next April, there's another pile of subprime, Alt-A and prime mortgages that reset. Consumers are holed up right now, and they account for 2/3 of our GDP.
If you're close to retirement or count on your equity investments for current income, our advice would be different than if you're 10 - 20 - 30+ years from retirement.
While it is conceivable that the market may rally (trend-wise) for 3 - 6 months, we don't expect it to last that long (though depending upon news that develops that opinion may change) - and while the Wall Street Journal reported that the "Ben Graham P/E" of the market as of Friday's close was the lowest it's been since 1989 - that was actually only a little lower than the 100-year average. And when markets bust, (on average), they bust down to a P/E below 10, often bottoming out at 6 (both pre- and post-war). And if we're in a recession, the denominator, earnings, will fall, so Friday's 10-year market P/E of 14 would have to fall just to stay at 14.
To bring the market (on current earnings) down to a P/E of 10 (the S&P 500), the S&P 500 would have to bottom out around 600 - a 30% drop from Friday's close (and the market was up 11% today). An equivalent drop would take the Dow down to below 6,000.
In order for the "Graham P/E" to get as bad as it did in 1982, the S&P 500 would have to fall to roughly 400 (more than a 50% drop from Friday's close). Again, a similar drop in the Dow would be Dow around 4,000.
Interestingly, from a technical perspective, depending upon the method used - but a common one comes up with Dow 7,000 - and using longer-term outlooks, comes up with Dow 4,300.