By Prieur du Plessis - March 15th, 2009, 11:51AM Words from the (investment) wise for the week that was (March 9 – 15, 2009)
Global stock markets surged over the past four days as investors adopted a more positive view of the prospects for the beleaguered financial sector and shrugged aside gloom about the economy. Citigroup (C) on Tuesday said it had turned a profit from operations for January and February (BUT did not mention credit losses, toxic paper, derivatives, etc.). JPMorgan (JPM) and Bank of America (BAC) later made similar comments.
A positive shift in investor sentiment, together with the possibility of the suspension of mark-to-market accounting and the reinstitution of the uptick rule, resulted in the best week for equities since November.
Extremely oversold markets bounced off levels last seen 12 years ago in the case of the S&P 500 Index and the FTSE Eurofirst 300 Index, and 26 years ago as far as the Nikkei 225 Average is concerned. Talking about being oversold, the Dow Jones Industrial Index has been down for 13 of the past 16 months.
As shown in the table below, the major US indices gained strongly during the week, recording only the second up-week out of ten in 2009.
The stock market “internals”, or market breadth, like the up/down volume spread, the advance/decline spread and new highs/lows have improved dramatically over the past few days and auger well for the nascent rally. Yet, the market still needs to do a considerable amount of work before evidence of a primary bear market low will be demonstrated. As a first step, the indices must clear their respective 50-day moving averages, i.e. the S&P 500 and Dow Industrials need to rise by 7.4% and 8.3% respectively.
I will soon have the privilege to meet face-to-face with Richard Russell (Dow Theory Letters) again at the time of his Tribute Dinner in San Diego on April 4, when he will undoubtedly share his market wisdom. Meanwhile, he commented as follows yesterday: “So where are we now? Over the last few weeks the market has become drastically oversold - at the same time investors’ sentiment has grown progressively more bearish. Furthermore, since September 2008 we have experienced an amazing twenty-one 90% down-days, which may have exhausted the urge by big investors to sell.
“By the way, yesterday [Thursday] was a 90% up-day, the second of this week. This action strengthens the thesis that this advance has further to go.
“… are we now in a new-born bull market, or is this an upward correction in an oversold bear market? … on the basis of duration and values, I believe we are experiencing a significant upward correction in an ongoing bear market.
“How far might this rally carry? Every movement in the stock market, minor, secondary or primary, is eventually corrected. Upward corrections in bear markets tend to recoup one-third to two-thirds of the ground lost in the preceding down-leg. The bear market will do whatever it has to relieve its oversold condition and at the same time lure the greatest number of investors back into its folds.”
On the topic of rally “targets”, Adam Hewitson of INO.com prepared a few slides dealing specifically with key levels. Click here to access the presentation.
Not putting his faith in further upside potential, Bennet Sedacca (Atlantic Advisors) said on Friday: “We are taking profits after the recent 13% move in equities. The macro-economic view is just too negative for me. It never, ever hurts to take a profit. We are back to 0% equities.” Sedacca’s price target for the S&P 500 is in the 350-400 range, which is a decline of 47-54% from current levels. He sees the ultimate low only by October 2010.
Using rolling ten-year reported earnings, my research (based on Robert Shiller’s CAPE methodology) shows that the “normalized” price-earnings ratio of the S&P 500 Index is currently 12.6. This compares with a long-term average of just more than 15. Based on the historical PE/return patterns, this would imply average ten-year real returns off these levels in the order of 8% (see graph below). Although, at index level, this may not grab one as bargain basement returns, it certainly is starting to point to a broad area within which opportunities should arise for the judicious stock picker.
The debate on whether stock markets are witnessing A bottom or THE bottom will take a while longer to resolve. Taking one step at a time, it is quite conceivable that the rally may last until the release of potentially ugly earnings and guidance announcements in April, by when a clearer picture should emerge on whether the bottom has been reached or yet lower levels are in store.
so much more...
No comments:
Post a Comment