ST, it sure acts like Mar 2000. PE on the S&P is 32, a level that historically preceeds a crash. The market has been extremely overbought on worsening economic conditions. There are many factors contributing to recent extended rally: (1) oversold condition following 9/11, typically a bear rally on oversold barometer tends to overshoot as we're seeing now, (2) positive war news leading to the belief that this war will end soon (not true, IMO), (3) hope for earnings rebound in 6 months (I highly doubt it, same was said 6 months ago), (4) the misconception that lower interest rate and particularly the government stimulus package will bail the economy out of a recession quickly (fat chance, ain't gonna work).
So the $64,000 question is when is this market pulling back, and what are the catalysts? I think soon, and the catalysts are:
(1) Correction of overbought condition
(2) War front has less and less positive effect on the market, coupled with fading optimism of an ending war
(3) Over the next month and into Jan, companies will reiterate the no visibility concern, and cast doubt on hope for earnings rebound in 2H/02
(4) Business investment continues to be constricted regardless of low interest rate, and rightly so since business investment is stimulated by demand, not by availability of money
(5) Unemployment continues to rise over the next 6 months, could take it to 7%
(6) Auto sales will tumble early next year mainly because sales were borrowed into last month
(7) Despite some encouraging retail sales numbers on Friday, sales in the weeks ahead will be sluggish and below the current upbeat expectation. Already sales took a sharp decline on Sat/Sun after solid numbers on Friday.
I'm short this market and will patiently ride it down.
Regards,
Tom |
