Bull Pen - Fall 2006

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Friday, February 23, 2007
Stock Market Review 2/23/07
Technical analysis video review of the stock market and individual stocks for Friday February 23, 2007 including; Nasdaq 100 Trust Shares (NASDAQ:QQQQ), S&P 500 Index (AMEX:SPY), Semiconductor HOLDRs (AMEX:SMH), MidCap SPDRs (ETF) (Public, AMEX;MDY), Dollar Financial Corp. (Public, NASDAQ:DLLR), and SiRF Technology Holdings Inc. (Public, NASDAQ:SIRF). Trend analysis for daytraders and swingtraders of stocks and options. Trading stocks involves risk; this information should not be viewed as trading recommendations.


http://alphatrends.blogspot.com/
 
Don Hays says that stocks are as cheap on a forward earnings basis as they have been since 1995. The forward P/E dropped from an alreadt low 15.3 to 14.7 in the past few days. Wouldn't I like 2007 to be similar to 1995. Ca-ching.
 
Birchtree said:
Don Hays says that stocks are as cheap on a forward earnings basis as they have been since 1995. The forward P/E dropped from an alreadt low 15.3 to 14.7 in the past few days. Wouldn't I like 2007 to be similar to 1995. Ca-ching.
Click to expand...

Gotta love that forward bias! That's the part we tend to forget when there are big down days. What goes down must come up, then go up more.
 
Here is a 10 year chart of the P/E ratio for the S&P as of today. I would not see a significant drop in the P/E ratios as a long term bullish trend, but as a confirmation that the long term trend of PE ratios is in a decline. Check out the link which details PE ratios from 1946 to 2002 and fill in the gap with the chart. It's not a pretty picture in the long run. This is the kind of stuff that coupled with recession fears could cause a 10% or more pullback.

P/E ratios 1946 to 2002

View attachment 1456
 
Griffin, nice info on that site. I just find it amazing that since 2003, the stocks have been going up, but the P/E ratio has been going down, which means stocks have gone up slower than they should have. Wouldn't that indicate they should push up higher?

Or are we expecting the P/E ratio to always stay within an average over time? Shouldn't inflation make it more expensive to buy earnings? Shouldn't we expect the P/E ratio to rise over time anyway?
 
The SPX has been in a solid uptrend since the triple bottom in '02-'03. Since Feb'04 the SPX P/E has been falling (from 18.4 to 13.7) while the SPX has been rising from (1140 to 1460). That is, earnings have been rising faster than the stock market, which has functioned somewhat to compress aggregate P/E ratio of the SPX quite significantly. The downward trend in the market's P/E ratio is now under some pressure to break to the upside, which suggests that P/E multiple expansion is quite possible over the next 1-2 years. A key question for 2007 may be whether P/E expansion occurs because the "P" goes up or the "E" goes down. Higher quality stocks (C fund) have outperformed during every period of P/E expansion in the past 20 years. I'm absolutely staying bullish on the prize - greater multiple expansions.
 
Fabijo, there is no easy way to explain this.

You can go round and round about what changes in P/E ratios mean. For example: are earnings going up or is inflation simply making earnings appear to be increasing? Are prices going down because the expectation is that earnings are going to drop? These types of questions are what drives the market fluctuations. P/E ratios are not technical indicators, it is a measure of value. If you hold the P or the E constant then you get all kinds of reason why the other is changing in any given market scenario. But that is not what P/E ratios are for.

What P/E ratios are useful for, is comparing individual stocks within a class of stocks, the general assumption is that if several companies are comparable and one has a lower P/E ratio then the others, the one with the lower P/E ratio is the one you would want to own because it is the one you would expect to normalize up (price go up). This is not relevant to this discussion except that it helps to understand the concept of value.

Obviously we expect the prices to bottom at some point and stock prices to go back up, that's a no brainer.

What is relevant is that we are talking about the value of stocks and in supply and demand economics, this means that a decreasing P/E ratio for the S&P 500 is indicitive of declining demand for stocks and hitting a decade low means a decline in the value of stocks as a whole. While in the short term (given a period of plus or minus a couple of months) this may be a inflection point from which stocks recover, it is not a buy indicator.

Would you buy a stock that is hitting a new decade low but has been significantly lower in the past and has been trending down for years and you can't formulate a support level for?

Birch is applying dip buyer mentality to P/E ratios but then relating a potential recovery to multiple expansions. (significant economic expansion). They are absolutely not one in the same. Any time-frame that would be appropriate for the use of P/E ratios as a buy/sell indicator is so vast, that it is totally inappropriate for use as a timer.

My point is that this becomes another bad news story and about all you can say is that stocks are at there lowest value in more then tens years. You can interpet this as the cheapest they have been in ten years but in absolutely no way does this tell you that they are not about to get a whole lot cheaper.
 
We are seeing things with this bull market that we've never seen before. Liquidity is still very fluid and this is going to keep the rate of decay in the price averages to a minimum. The NYAD line is still holding above its' 10% trend (19 day EMA). A bear market of greater than 10% has never taken place without the NYAD line diverging with price first. The NYSE TRIN information of the 21 day and 55 day moving averages are fully washed - so either we're setting up the most important bottom ever seen in the markets with a TRIN of 16 or one heck of a bear market is beginning. I'm ready for P/E multiple expansions.
 
The old Norton helped me ride many a cycle correction back in the days of the October massacres when you only knew you hit bottom when you landed in water - at #120 I'm close to the bottom of our current well. But I sure enjoy buying C fund shares at a $0.74 discount - gets that many more shares to help with the portfolio, so I'm hoping this market doesn't meltup like I think it will. This will take me out of the limelight and I'll finally be conspicious by my absence of any rating. My Ducati I'm sure will serve me fine.
 
Birchtree said:
The old Norton helped me ride many a cycle correction back in the days of the October massacres when you only knew you hit bottom when you landed in water - at #120 I'm close to the bottom of our current well.
Click to expand...

I'm not far below you! I'm at #124! :D
Who can hit the bottom first?
 
As long as the Chicken Littles and varous and asundry Lilly Padders remain on the cozy side - the climb out should be easy. Now folks don't take offense because you are more interested in capital preservation - there is nothing wrong in that strategy - I just prefer more excitement and am willing to make the self-sacrifice to get some. Capital appreciation is my ultimate goal and one has to assume a degree of risk.
 
I've talked in the past about the July 2002 back to back 400 point meltup days and how you had to be positioned to participate. This same situation can now easily happen again with all this global liquidity sloshing around and one has to be previously positioned to benefit if it does happen. What are the odds? Who would have thought we'd drop 409 on Tuesday and wipe me to the tune of $58K - man I've never made than much money in one day - but there is always a first time and this time if we get a 400 point meltup it will be much more than $58K for sure. Those that ride the Ducati see the sites.
 
Just looking at the Nasdaq charts and it seems the nasdaq has been making a series of higher Highs and lower Lows since making a bottom in late 2002 but the corrections have been more severe as compared to the Dow and S&P 500. There also seems to be some serious price symmetry in the Nasdaq since the middle part of 2004 as each 25% to 26% gain has been followed by a 14% to 15% correction. Meanwhile the last big upward move in the Nasdaq from July of 06 through February 07 was what up about +26% so if we now see a 15% correction could we see 2150??​

white​
 
Bartels sees NASDAQ Composie support at 2400-2320 and has a new target in 12 months of 2800-3000. I think the index just recently penetrated its 200 day EMA that has been providing resistance before the latest decline.
 
Saturday, March 03, 2007

Fear Breeds Opportunities
Last week's dip within a strong uptrend provided investors with an excellent time to buy. Fundamentally, there was no reason for the market to react as negatively as it did, but psychologically, the dip was a normal human reaction to fear. Now, fear is a much more powerful emotion than greed (as evidenced by the popularity of investment advisories bearish for the last two decades and who have missed out on the market's better than 1000% gain since 1987).

Fears which came to the surface, catalyzed by China's very reasonable attempt to quell an overheated stock market, included:


The US economy is facing a recession this year.

Journalists, known for being even more wrong about markets and the economy than even options traders, reported that Alan Greenspan had predicted a recession in 2007. Despite the fact that the report was false and that Alan Greenspan's record of predicting both busts and booms in the economy is atrocious, the story continued to be repeated every day and all week in newspapers across the country, quickly reaching the status of Urban Legend.

In the real world, there are no reliable indicators which point toward a recession in the US this year. Instead, they are pointing toward an economy picking up its growth rate to 3-3¼% from last year's 2% rate. At the same time, inflation is falling into the Fed's desired 1-2% range.


The Chinese economy is slowing drastically and, being the engine of worldwide economic growth, will pull the world's stock markets under.
This is demonstrably false since the Chinese government is simply protecting the market from getting into a position similar to the Japanese market of the 'Eighties: overvalued and prone to crashing. Eliminating "irrational exuberance" helps keep the market from inefficiencies of asset distribution and promotes the working of the free market. The US could take a lesson from the communists in this area.


The Yen-carry trade, where investors borrow money from Japanese banks at incredibly low rates and invest the money in other markets which pay much higher rates, will be unwound, causing massive selling pressure.
This fear is false as well since the Japanese loan rate is still incredibly low at just ½%. Currency adjustments do affect the yen-carry trade, but there is no reason to believe the USD will fall against the Japanese Yen over any reasonable time period unless the US goes into a recession or the Japanese economy goes into a boom. The chances of either of those events is essentially zero over the foreseeable future.


The growing malaise in the housing market, and most especially the so-called "sub-prime" market, will spread to the rest of the economy.
Again, the probability of the housing market bust leaking into the economy is almost zero. All reliable indicators show no sign of recession, which would be the only reason the housing bust could affect the overall market.

Now, one thing that is evident over time is that severe corrections are a bull market phenomenon. Bear markets tend to exhibit corrections as well, but there they are manifested as sharp rallies. In an overall uptrend, the rate of advance is generally fairly low and last a very long time, but the corrections against that uptrend tend to exhibit very high momentum. This is why the majority is usually wrong: the severity of corrections produces a corresponding fear reaction, causing the timid and weak investors to flee stocks for "safer" investments like money market funds or bonds, while the gentle advance in the major trend produces a much milder emotion: complacency (which is why trailing sell stop orders are used to take profits and to "refuel the account" for buying the dip).

One way to measure complacency is by use of the VIX index, which measures the implied volatility of S&P 500 index options. That measure soared 83% last week as short term traders rushed to buy a massive amount of puts. Before last week, that gauge had been hovering at the 10 level, a level which is historically very low. The sharp rise in VIX is very similar historically to the rise which occured in 1995, right at the beginning of the greatest bull market of the 20th Century. Investors suddenly realized that there is risk in the market and bid up the price of puts, doubling the value of VIX by the 8th of March. But, as we said, sharp corrections are a phenomenon of a rising market and this rising trend in VIX is actually a confirmation that the market may have entered a stronger trend to the upside. The dip is just the market's way of redistributing shares from the weak hands who are easily scared out of their positions into strong hands who recognize opportunity when it comes knocking.

The weak hands tend to fall into a trap of believing that a rising VIX is a sign of a bear market. A look back at market history shows that short term corrections indeed associated with a rising VIX as that strong emotion, fear, bids up puts. But, when viewed with a longer term perspective, a slowly-rising trend in VIX during the latter half of the 'Nineties was clearly a hallmark of a strong bull market.

A correction within an ongoing uptrend provides investors with an excellent opportunity to take profits, then buy back in for the resumption of the uptrend, which could come as early as this week.

Friday's market retested the week's lows. For the week, the market definitely shook the weak hands out:

http://marketclues.blogspot.com/
 
robo said:
In the real world, there are no reliable indicators which point toward a recession in the US this year. Instead, they are pointing toward an economy picking up its growth rate to 3-3¼% from last year's 2% rate. At the same time, inflation is falling into the Fed's desired 1-2% range.
Click to expand...

Growth has been on a down trend and that's a fact. 4th QTR growth was suppose to have picked up due to warmer weather, hence the 3.5% advance GDP last month. Last Wednesday, it was revised down to 2.2%.


Currency adjustments do affect the yen-carry trade, but there is no reason to believe the USD will fall against the Japanese Yen over any reasonable time period unless the US goes into a recession or the Japanese economy goes into a boom. The chances of either of those events is essentially zero over the foreseeable future.
http://marketclues.blogspot.com/
Click to expand...

What is this guy smoking?
 
Robo,

You've got my feet dancing under my desk - I hope I can sleep tonight with all these sweet plums in my head. Thanks alot for your contributions. Snort.

Dennis
 
Todd Market Forecast Stock Market Update for Thursday 03/01/07


www.toddmarketforecast.com

Available Mon- Friday after 6:00 p.m. Eastern, 3:00 Pacific.

DOW - 34 on 650 net declines


NASDAQ COMP. - 12 on 950 net advances


SHORT TERM TREND Bearish

INTERMEDIATE TERM TREND Bullish


STOCK MARKET ANALYSIS:

Over night in Japan, the Japanese Vice Minister of Finance stated
that the yen carry trade was not a one way street and hinted that higher
interest rates were on the way. This caused more selling around the
world and the Dow was down over 200 points in the first 15 minutes of
trading. It must be said that a lot of this weakness was the result of
stops being hit which forced the markets down a bit artificially.
So exactly what is the yen carry trade? Interest rates are very low
in Japan and speculators and aggressive investors world wide borrow
there and re-invest in higher returns such as bonds, stocks and even
real estate. Of course, a lot of that can be unwound if Japanese rates
rise. Also, since these loans are in yen, what happens if the yen rises
against other currencies? It means that you have to pay back more than
you borrowed which is the same as a rate increase. A sharp yen rally can
cause a lot of liquidation of assets such as stocks.
On a more cheerful note, a recent Harvard study says that
historically, these types of smashes occur about every six months, but
we haven’t had one since March 24, 2003. So what happened after that?
The market bottomed five days later then rallied for seven months.
I think we are near a tradable bottom, at least time wise, but it’s
probably going to take a few days for things to calm down and begin the
next uptrend. Stay tuned.

NEWS AND FUNDAMENTALS:

The ISM number, which measures national manufacturing, came in at
52.3 for February. This was higher than January’s 49.3 and the consensus
50.0. Personal income rose 1.0%, more than the expected rise of 0.3%.
Personal spending added 0.5% which was more than the consensus rise of
0.4%. The core PCE price index gained 0.3% again more than the expected
0.2% and makes the year over year figure 2.31%. Finally, initial claims
were 338,000, more than the consensus 335,000.
On the stock front, Apple was upgraded by Lehman and gained 3%.
Cooper Tire and Rubber jumped 16% on increased sales. EchoStar rose 5%
on earnings. New Century Financial gained 3% after an upgrade by UBS.
On the negative side, Ciena dropped 10% on expense concerns.
Circuit City lost 4% after a downgrade by Piper Jaffray. Constellation
Brands and Natco Group tumbled 15% and 10% after guiding lower.

BOTTOM LINE:

Our S&P and NASDAQ intermediate term systems are on a buy signal.
Mutual fund investors should be in a 100% invested position.

Short term ETF traders are in cash. Stay there for now.

OTHER MARKETS

We are on a buy for bonds as of January 31.

We are on a sell on the dollar and a buy for the Euro as of Feb. 15.

We are on a buy for gold as of February 21.

We are on a buy for crude oil as of February 22.

We are bullish for all major world markets, including those of the U.S.,
Britain, Canada, Germany, France and Japan.



STEPHEN TODD

A SHORT BIOGRAPHY

Editor and publisher of the Todd Market Forecast, a monthly stock
market newsletter with an included nightly hotline.

Steve has published articles on the stock market in the following
publications: Barron’s, Stock Market Magazine, Futures Magazine, The
National Educator, and others.

His stock market commentary is heard on the following stations: CNBC,
Bloomberg, CNNfn, Associated Press Radio, Business Radio Network, CKNW
in Vancouver, British Columbia, KFWB, Los Angeles and ROBTV in Toronto,
Ontario.

RANKED # 1 BY TIMER DIGEST

Timer Digest of Greenwich, CT monitors and ranks over 100 of the
nation’s best known advisory services. If you have heard of an advisor,
it is likely that he or she is monitored and ranked by Timer Digest.

Once per year, in January, Timer Digest editor Jim Schmidt gives the
rankings for all services monitored for multi year time frames. The
latest survey has us ranked # 1 for the past ten years.

http://www.decisionpoint.com/TAC/TODD.html
 
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