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Strategies & Market Trends : Waiting for the big Kahuna
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To: William H Huebl who wrote (26668)9/6/1998 3:05:00 PM
From: Philipp  Read Replies (2) of 94695
 
Hi Bill:


This market is not much different than it was a year ago.

In a sense I agree. The market was highly overvalued last year, now it is astronomically overvalued.

But reduced earnings expectations may be a healthy thing and may justify increased investor commitment to the markets.

Yes, but first the market has to discount the lower expectations. Also the expectations are still far too high. If realistic expectations were priced into the market, we would have to fall to 5000 Dow (historical average; about right for flat profit projections). But Greenspan warned correctly that the stock market tends to overshoot.

Last year, the market could have adjusted itself by a modest correction (20 - 30 %) when earnings growth was still a realistic expectation. But anything less than an 87 correction will only delay the day of reckoning by a little bit (another year perhaps?). Actually, I think that we need something far more substantial. The 87 correction was a healthy correction in a bull market.

Sorry, but I think you are wearing rose-tinted glasses.

You are probably right that there is a lot of money waiting on the sidelines. But foreigners certainly seem to be withdrawing support, and that support was a key element in propelling the market on its last leg up. Most of that money will wait till there is a clear turnaround and then, well then you probably get your explosive rally, but probably starting at a much lower level than we are at now and it may only be the first leg of this bear.

Regards,

Phil

P.S.: Barring any bad news in the next two days, Tuesday should be a good sentiment test. When will the sellers abort any potential rally this time (no positive signs on this front so far)?
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