6 replies to this topic

[nimblebear]

I think when people see charts like this they start doubting the source. This unfortunately is accurate. Even during the Great Depression, when the market plunged to the depths, the PE ratio never even touched 20 and some of the many mini-rallies after the crash of 1929 involved legitimate looks at low PE ratios. A PE ratio is important because it factors in the price of a stock to the actual earnings. This matters. Even right before the tech bubble burst in 2000 the S&P 500 had a PE ratio over 40 and this was extremely expensive. In this case, we have 26,000,000 Americans unemployed or underemployed and earnings are simply not there with consumers pulling back. So what is causing this massive rally if not earnings? This recent rally is being driven by the “getting less worse” mentality. Sure, we lost 247,000 official jobs last month but sure beats 700,000! Okay, earnings are way low but it beats actually losing money! This kind of thinking is leading many sheep to the slaughter again. Take a look at some of the official data from S&P itself: Chart 2 : Source: S&P At the end of last month, only three weeks ago the S&P 500 data had the PE ratio at 143. So to currently have it at 129 is a slight improvement. But with only 3 percent of companies left reporting to close out the quarter, we are massively over priced. We have never seen the entire index suffer a negative earnings quarter that is until recently. So the crash wasn’t a panic but actually based on declining earnings. That quarter saw $202 billion in negative earnings (losses) from S&P 500 companies reporting. Q1 of 2009 saw reported earnings come in at $7.52 per share. So right now, everything looks good when looking from the ground up. Looking forward looks just as bad if not worse. Optimistically we MIGHT see a P/E Ration drop to 70 at end of Q3 IF earnings come in anywhere near forecast of $14.53. And keep in mind, a big jump of earnings in these last few quarters involved massive infusions of free money into the banking sector. In other words the banks and businesses and economy had been juiced to high heavens !!! Do folks not realize that there are still some $3 trillion in toxic commercial real estate debt left? Of course on the estimates, you can see that the financial sector is having the best expectations. The industry that brought us the credit and housing bubble is now going to lead us out of this massive recession. We are in good hands. Many now agree that this is the worst recession since the Great Depression. Yet many think things will turn around in a few months. These kind of market dislocations last years and impact generational thinking. There is a new austerity out in the market. In fact, this new spending habit is taking hold so deeply that the government had to entice people to trash their working vehicle for a new car. People are surprised that the cash for clunkers program worked. How are they shocked? Free money for your bucket and a new car? Who could have ever seen that coming! Yet even the analyst estimates put the S&P 500 at a PE ratio of 70 for Q3 of 2009. A more normal average PE ratio even at the high end would be 20. From the mid-1930s to the 1980s the PE range would peak out in the low 20s. But then, the technology bubble and housing bubble gave us two decades of wild valuations. But let us assume a high 20 PE ratio. What should the stock market be valued at? (X/ $14.57 Q3 2009 estimate) = 20 PE ratio

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[OEXCHAOS]

Has anyone ever known a short-term trader to make money consistently trading off P/E's?

[porsche911sg]

Has anyone ever known a short-term trader to make money consistently trading off P/E's?

I never traded on P/E.. unless intending to buy and hold stocks for long trm investment wihich i do.

Say I'll starting buy 100 lots at crash bottom first ten percent rise I'll sell 30 lots 20% rise another 30 lots 30% rise 30 lots...

I'll keep the last ten lots... and look at P/E... Will consider selling when they reach that super duper over price line.

[cgnx]

Hey NB, do you have an idea what the p/e was for the Dow in 1929 before the big dump? I don't think people are buying stocks based on p/e. Book value might be more in line here. I have never seen stocks trading at such low valuations in my life real time as we saw back at the lows. Forced selling pushed prices down to the best value in a very long time. Buying is driven imo by the amount of paper dollars floating around out there. Plenty more paper was produced and the big institutions desperately need stock valuations to increase to survive. So, forced buying is now the play. It's buy or die. As prices increase so does the system. This is our only hope. I would not bet the farm against it.

[nimblebear]

Has anyone ever known a short-term trader to make money consistently trading off P/E's?

True, but there are a lot of short term traders getting their heads handed to them even during this nice rally.

Problem is, when is the turn, will they react fast enough, and after the turn will they ride it the right direction to make money consistently ?

I'm not that good. Hence why I trade IT mostly.

I think Gary's comments hit the nail on the head for many people going forward:


"A great many investors and money managers have been surprised by the stock market's relentless march higher. But as you look at the charts of the Nikkei we see that’s exactly what happened in Japan. Every rally unfolded in under a year. Almost every decline took much longer. For the impatient trader you were better off playing the long side because the gains came much faster than the losses.

There’s probably a pretty good chance that something similar is in our future for the next decade or two. This is going to be a market timers nightmare. History has already shown that the majority of market timers don’t make much if any lasting long term gains in the market. Add in extreme volatility and ever greater government intervention and you end up with a market that’s going to be next to impossible to trade effectively. Sure a few may get lucky from time to time but over the next 10-20 years I dare say almost no one is going to make any lasting money trying to guess the markets volatile gyrations as it gets pulled back and forth by the deflationary forces and the governments attempts to thwart them. Traders are probably going to be running up a mountain of sand for years to come."

Are you that good to have traded the Japan market well during the 90's ? Are you absolutely positive all of your TA is going to work properly in this type of environment ? have you considered that what worked well during a bull market, will work equally as well during a deflationary environment of epic proportions that the globe has never seen before - possibly far worse and more confusing than Japan even saw ? or maybe it wont work as well, or at all ?

Japan had numerous mega rallies just like we are seeing now. I'm not saying TA won't work, or that anyone here isn't that good, but you simply can't ignore the backdrop, and the P/E's and the global environment we are in. American's,by nature are extreme optimist's. Our ancestors ALL came here to seek a better life. We are a country of immigrants, not natives. We succeed in many cases becuase of that optism. Its how we got to the moon. Its how we won World Wars. We have endured and prevailed in many circumstances that others would have wilted away.

If you want to diss me on P/E ratios not being relevant, or allowing you to make money, that is certainly your perogative. I just point out this rally is based on something other than organic growth, sustainable fundementals and can turn on a dime without warning. There simply far too many distortions in the market place, and manipulation by the Fed, and new High frequency, or front runnign trades with far more powerfull computers,algorithms, and situations the trader has never seen before. Someone who was succesful in the 70's, 80's, 90's or even early part of this decade, may not necessarily keep up his mojo right now. The cocky ones are especially susceptible as in any endeavor in life. have you ever heard of the Peter Principal ?

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[Not Too Swift]

GAAP earnings are so... quaint. We live on earnings without bad stuff now.

[OEXCHAOS]

My point is that earnings are fiction. More so now than before. They don't drive stock prices on the short term and I have serious doubts about the intermediate-term. Long term, we can point to all manner of P/E studies. I'll accept them at face value, but I wonder if that's relevant any more, either. I just don't think that they will have any utility to you, over a good set of MA's and cumulative breadth. M