Mohan,
Yesterday (after ORCL announced), many ORCL bulls turned bears. But, as the price dropped by 33%, the (converted) bears turned bulls again. Thus, investors are ready to change their status from being a bear to a bull or vice versa, as the price changes to reflect new information. I would thus revise my statement for the market as a dynamic tug-of-war between bulls and bears until the price adjusts to convert enough bulls to bears or vice versa. Obviously, investors (as bulls or bears) are driven by their greed, fear, emotion or whatever -- without some incentive the market would not exist.
ORCL's bull:bear ratio (before earnings announcement) was perhaps close to the market's 98:2 at the price yesterday. This ratio must have quickly dropped yesterday evening after ORCL announced earnings (because the price was still ~32). When the price fell to ~22, the bull:bear ratio at the new lower price got restored to an equilibrium.
The reason for discussing the ORCL example is that the current market bull:bear ratio of 98:2 is a function of the current information for the market as a whole. Enough of individuals (who are currently bulls) will dynamically transform into bears as the new information dictates, because of their incentive. The fact that they are remaining bulls means that the current information does not warrant a transformation.
Incidentally, I see a lot of mis-information on the current P/E being very high -- as high as that during the pre-1987 crash (implying that a market crash is imminent). S&P 500 E/P is, approximately, equal to the interest rate (R) in a no-growth environment. Historically, this equilibrium has been maintained and the WS has quickly corrected for any imbalance. Thus, the relevant measure is R*(P/E), not P/E. If this R*P/E is greater than 1, the market is over valued; otherwise it is undervalued. I would be pleased to have statistics from those who claim that the market is over-valued or under-valued to provide a year-by-year R*(P/E) measure for the S&P 500 index. [I do not have the time to do this.]
Sankar |
