Dear Readers, Sotcks are tittering on the brink. One wrong move (see "Need An Opening salvo" ) and we see trouble. Currencies, important juncture, down leg before, perhaps, final leg up, is stretched. Means, major low in $ rgistered early May?. We hope for a hiccup into 23/5. This was more probable scenario than the 23/5 top, even if never stated this clearly. Hard enough to predict May low!. Gold/Silver in problems, as stated long while ago, not buying them until June/July. Energy, big part of SPX(10%), staying up, mostly on profits from refiners, while OIL is heading lower. Most of SPX profits comes from it. until this Smoke/Mirror keeps up, market will look OK, but it is coming to an end. Bonds stuck still. Good Trading
14 comments:
Tomorrow is options expirations, and the prevailing pattern so far has been to drift higher. So I don't think we'll get much downside at least this week. Plus, there's an ascending 'triangle' setup on the SPX which makes me think that there may at least be a breakout on the upside to touch 'old' nominal highs, we're not far from it anyway. After that...
Dear Jebuskrite, good to hear from you. Scenario you describe, has merit. In my safehaven.com article I had insted the 1550 as the high for the SPX. It does not have to happen, but it has the good chance. For my part, I am now totally in control of short term tools/thinking, here and now indicators. I am alsways like that, but especially now. Good Trading To you Dear Jebuskrite.
Dear Boris,
How long usd will going up ?
When we can expect $ topping and turnaround time ?
Thanks,
valry
Dear Valry, as outlined, may times, many places, the $ is to go sideways to higher into Sept 2007. After which we expect another decline into March/May 2008. Rise of 5-7% would not surprise me at all for Sep high. Good Trading Dear Valry
Buy the way, is Valry is shorthand for Valery ( one of my Favorite Russina names)?
Thanks for comments.
You right about my name.
valry
It's been a while since I've posted my "spread" of ten year yields vs S&P 500 "yield". By S&P "yield", I mean what rate is required to discount to today's price the future earnings on the S&P 500.
Last week, S&P raised the earnings estimates for this year to $89.60. With the S&P at 1514, the discount rate or implied yield is 12.49%. When compared to the ten year yield at 4.74%, the spread is 7.75%.
The average spread for the last twenty years has been 4.92%. If the average spread is used with the current 10 year, the fair value of the S&P 500 today is 2,150.
BTW...the spread on 12/31/1999 was 1.54%...at that spread, the S&P 500 would be at 3,517
Just something to keep in mind.
John B
Just something to think about.
John B
John, could the current disparity also mean that interest rates are too low ? DaveO
Dear Daveo/John, the question is extemely relevant. That was the case in 70's the real interest are depressed artificially to let the "unaware" come in and then the valuation evaporates as the interest rates skyrocket, with people finally catching the real "state of the inlation". I find fed model making the same mistake. It was popularised by the FED bulls and Bools to make us think we are in better env than we really are. I could be wrong, on this, but probability is that the lie will come out sooner or later.
Good Trading
The model I made up has nothing to do with the FED model. I really attempted to avoid such a pitfall as something so simple and mechanical.
Instead, I look at the earnings projections for the S&P 500 published by S&P about every week. Next, I look at the long term growth in earnings over the last 20 years, which has been about 8%. I then grow the published earnings for the next twenty years at the 8% rate. Last, I calculate what discount rate is required to discount those earnings back to the S&P price today. As I stated, that means a reasonably prudent investor would expect to realize a return 7.75% greater than buying the 10 year T-Note.
THIS IS NOT A MARKET TIMING TOOL!!! But what it will do is put up caution flags on when the market appears to be overbought or oversold. The average for the last 20 years has been a spread of 4.92% with a high of 8.20% on September 30, 2006 and a low of .40% on March 31, 2001.
Good luck
John B
Dear John, the calculations you have presented look at the interest rates and FED model looks at the same. When/if interest rates are skewed without real foundation ( China/Sheiks forced to buy US bonds/mortgages ) the formulas ( both ) give the same wrong indication. That is all that I meant by my remarks. The calculation you present is a classic calculation and there is nothing wrong with the formula. As a computer person, though, I anybody will tell that garbage in means garbage out. In this case my experiense tells me the the interest rates input is "garbage". Nothig wrong with your logic, but with the data input in.
Good Trading Dear John.
And Really We/I appreciate your input. Again please understand we find nothing wrong with reasoning. Just the data.
The data I use is the earnings for the S&P and historical growth in earnings. From those inputs I derive the implied discount rate and then compare that rate with the yield on the 10 year.
The FED model looks at the yield on the ten year and essentially does a reciprocal to derive P/E. The two methods are very different.
But your point of interest rates being too low is well taken. If rates are too low, the comparison with the ten year will be incorrect because it will show the spread being too large.
However, in the FED model, such an event would drastically overstate the fair value of the S&P.
Regardless if rates are too low or not, if you are an investor and have two choices, stocks or bonds, the spread currently favors stocks. Does not mean stocks will go up or down, only that stocks are cheap to bonds.
Good Luck...I sure enjoy this blog.
John
Dear John, We agree that if the rates are "wrong" then the calculations will skew the results in both cases. Have that said the conclusion that stocks are cheap can not be justified. Cause the calculations are made now and the earnings are coming in future... therefore we must calculate with the projected interest rates not the current one. Nobody pays the same amount for 50 year old worker and 30 year old worker, cause the 30 year old worker has longer time to produce! Stocks marekt is discounting ( forward looking) not the backwards looking mechanism. So, with respect and understanding where you come from, we still disagree that stocks are cheap. Especially wehn we see the magnitued of Inflation Lie. But again future is in they EYE of beholder and you may turn out to be correct. We just do not believe it. Good Trading Dear John.
Dear Readers,John, just want to make sure, comparison 30 50 year old is shuld be based on the same level of skills ( of course experiense counts) that is not what I meant. So to prevent arguments, I place this clarification here.
GOod trading
Dear John, Readers, just a thought the balancing the interest rates lie usually shows up. Where? in $ worthless Dollar. That is why the SPX at 1500 is actully at 1250 adjusted in the $ index.
GOod Trading
Post a Comment