KB, it's true, a huge retrace like that would take at least two years, but it took six years to get up the point equivalent to this, i.e., from 1991 to almost 1997, so that's not really surprising.
Sure, charts tend to go up over time, but take a look at this chart of the DOW. From 1960 to 1981 it was range-bound between 800 and 1000. home.earthlink.net
A SPX at 350, assuming we revert to a 1995 or so normalized SPX p/e of 20 (off as reported earnings) means that earnings would have to drop from current earnings (6/30/02) of 27 to about 17.
First, I think the real PE of the SPX is quite a bit higher now than 27. I think 37 would be a decent guess, and with the recent rally factored in, a number in the mid-fourties is quite possible. "As reported" earnings are not, IMHO, worth the paper on which they are printed.
Second, according to the historical stuff I've seen, the average SPX PE at the low of a bear market is about 11, so 17 would still be much too high. Also, the PE of the DOW at the bottom in 1932 was between six and seven.
It seems more likely to me, in a very low interest rate environment, that we will stay at valuations in a band closer to where we are today, and that SPX earnings will stay in a similar band.
Low interest rates or not, I have to disagree strongly with this assessment. Today's PEs are, IMDO, completely unsupportable, even were I to believe the fabricated figures on which they are based, which I do not.
Those savvy (and brave) enough to buy AMD a few weeks ago at $3.00~ and negative earnings are rewarded today with a triple; obviously better than what Joe Sixpack got in the same time frame with a bond fund.
Actually, anyone who was keeping an eye on basic TA should have made a fortune from this rally, because it was telegraphed quite clearly. (NOTE: I, unfortunately, am not among those who were paying attention, much to my emotional and financial loss.)
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The moral of this story is, don't get caught up in one way of looking at things. I unwittingly became a perma-bear and, as a result, took a HUGE hit to my trading account at a time when I should have been able to double it.
Be careful that you don't get caught on the flip side of that, i.e., believing that things can/will return to the way they were during the 90's bull. They can't and they won't. Valuations that high simply cannot be supported.
This is a very impressive bear market rally, but that is all it is.
Final point:
Sure, 500 may be as low as the SPX goes. Heck, the October low of 768 may be as low as it goes for all I can say with certainty. But if that is the case the market will need to go sideways for an EXTENDED period of time in order for earnings to catch up with valuations. When I say extended, I mean a minimum of five years and probably more like ten, or more, of bouncing along in some kind of trading range. |
