Frank-
Frank, first, stopped out for small loss.
Have done FA on dow, LT overvalued, Technically ST, indicators not pointing down.
Here's an article I wrote, very simplistic, but shows dow's overvaluation.
warning, lengthy, feel free to skip.
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The Main Attraction Q3 2001: DJIA
Jon West
08/02/2001
For the last decade, even more so the last few years, the main attraction in the market has been the technology heavy NASDAQ. Even as the NASDAQ stopped outperforming, it kept the limelight as it declined in spectacular fashion.
This fall, look for the NASDAQ to give up some of the spotlight, as it becomes rangebound, albeit in a large range, with overhead resistance under 3000, and support most likely holding in the intermediate term around 1600.
I expect the stoic blue chip DJIA to give insight into market direction in the intermediate term. The blue chips have been downright boring since the start of 1999, trending around 10600 +/-15%. As the DJIA spends more time coiling about this level, it is simply building up pressure to propel its eventual break out of this range, be it up or down.
Now, although we will not know the direction of the next primary move in the DJIA until it actually begins, we can define strong support and resistance. Were the DJIA to close with conviction above 11500, it would send a clear signal that the next primary move is up. The move would be expected to be strong as well as fast, moving to at least the 13500 level. Equivalently, a break below support at 9500 could send the index to test old support from late '97 and '98 around 7600.
Although I rely on chart analysis to help me determine short-term price direction, I keep an estimate of fair value in mind. Over the extreme long term, stock prices are determined solely by company fundamentals, and stocks will trade at a price determined by their future earnings power and growth rate. Due to this belief, I look for fair value where P/E ratio equals long- term growth rate.
Keep in mind, this is a very basic valuation, however, I am only using it to help me gauge long- term valuation of a security.
With that in mind, lets take a look at the 10 largest market caps in the DJIA, and attempt to gauge long-term valuation.
Dow Jones 10 Largest Market Caps
(Growth Rates and Earnings Est. per Yahoo Finance)
1.GE (425 Billion)-
Price=43
Earnings Est.=$1.47 (FY2001)
P/E=29
Growth rate= 15%.
Significantly Overvalued.
2.MSFT (360 Billion)-
Price= $66.79
Earnings Est.=$1.94 (Jun 2002)
P/E=34.5
Growth rate=20% (15% per yahoo, upward revised per my gut feeling)
Significantly Overvalued.
3.XOM (290 Billion)-
Price= $41.75
Earnings Est. $2.47 (FY2001)
P/E=16.9
Growth= 7.5%
Significantly Overvalued.
4.C (255 Billion)-
Price= $51.21
Earnings Est. $1.99 (FY 2001)
P/E= 25.7
Growth= 15%
Significantly Overvalued.
5.WMT (245 Billion)-
Price= $55.55
Earnings Est=$1.53 (Jan 02)
P/E=36
Growth= 15%
Significantly Overvalued.
6.INTC- 205 Billion
Price= $31.93
Earnings Est=$0.51 (FY01)
P/E=62
Growth=18%
Wow! Significantly Overvalued! Possibly factors in some significant writedown?
7.IBM- 186 Billion
Price= $109
Earnings Est. $4.57
P/E= 23.8
Growth= 12%
Significantly Overvalued.
8.JNJ- 165 Billion
Price= $53.1
Earnings Est. $1.88
P/E= 28.2
Growth= 13%
Significantly Overvalued.
9.MRK- 155 Billion
Price=$68.07
Earnings Est=$3.14
P/E=21.6
Growth=12%
Still Significantly Overvalued.
10.SBC- 150 Billion
Price= $44.39
Earnings Est. $2.36 (FY2001)
P/E=18.8
Growth=12%
Overvalued. Looks almost cheap compared to the group.
Wow! Although I had been bearish on the market in general, the results of this research were far more bearish than I expected.
This data could lead to one of two conclusions:
1. The DJIA is overvalued based on extremely long- term fundamental measures. Secondly, The DJIA no longer has support from a long-term uptrend. These facts together give a higher probability that the next major move in the DJIA will be down.
2. On the other hand, the other conclusion is that my logic is flawed. Either my earnings estimates and my growth rates could be to low, or my idea of fair value could not apply in today's market.
By no means do I expect the market to immediately move south from here. Extremes in over and undervaluation often take an extended period of time to work themselves out of the market. However, per this analysis, any investor should take heed to the warning signals provided here and avoid becoming overly bullish on today's market. For those investors that agree with this analysis, you may want to begin planning how to profit from a possible coming market downturn.
Comments? Email me at jawest@students.wisc.edu>>> |
