<<Basically, the correction we just had didn't scare people that much.>>
Yep!! ...and therein lies the problem.
People are so acustomed to a bounce back after any correction since Oct. of 87, that they are using quick sharp declines as buying opportunites with the expectation that their investments are going to move higher rapidly. The sentiment of the average investor is still very bullish. The small/average investor has many positive forces in place to support thier bullish beliefs. Inflation is low and in check. The Feds are standing guard keeping an eye on inflation indicators and ready to act. Unemployment is low relative to the 80's and early 90's. As more people are in the workforce, more people are contributing to retitement savings plans. Money from the popular 401K funds are funneling into money managers to the tune of billions per month. The money has to be invested somewhere, usually in three choices (MM funds, equity funds, or bond funds). Since this is retirements money, and the majority of the workforce (by dollar strength), is from the babyboomers in the higher income brackets, the majority of the 401K money is in my opinion flowing into equities. Thus is the fundamentals of why the market is heading higher.
Valuation is a key point of this discussion. Most people base a company worth based on its peers and its previousely valuation. A company is overvalued or undervalued based on our ability to measure its PE, PEG, PSR, etc, etc, etc. Regardless of how you justify the over or under value of a company, it's all relative. It's relative to its peers, the industry it competes in, and the economic environment. The current long reigning bull market has allowed people to believe that valuations are more tolerant and should be higher than the past. They believe that "sure stocks are expensive now, but they'll be more expensive later"
It is my belief that most people have no clue on valuation, and it is these people that will sell, exacerbating (sp) any selling pressure when selling hits. This is also true about these new fund managers that are younger than some of my investments. I'm not that old (33), but you get the point. The new breed of money managers have some success in bull markets and limited in bear market experience. This begs the question, what will they do when the selling begins. Only time will tell.
In reading the financial columns this week, I've noticed that the breath of the market has changed. Numerous Forbes articles are now discussing what to do when the market falls as opposed to here's what to buy for teh next few weeks. The leaders like INTC, MSFT, IBM, SUNW, etc are not anywhere near their 52 week highs, and yet the market indices are closer to their highs (as a percentage, in general). There seems to be a rotation in leadership. I'm hearing reports (from a broker friend of mine)that a few money managers are rotating into small caps (in their case, smaller caps... not small caps like you and I).
From my limited experience, the market, is overvalued. It has moved up too far, too fast. However, it will not die a quick death. It has been trained to be resilent to the quick drop. My guess for the next two weeks: the market will slowly errode between now and Nov. and people will allow Sept and Oct to go by uneventful and drifting lower week by week.
I'm sticking my head out for all too curse, ccut or praise. We shall see wby the end of the year. Such is my opinion and sentiment.
Chester |
