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Strategies & Market Trends : MDA - Market Direction Analysis -- Ignore unavailable to you. Want to Upgrade?

To: pater tenebrarum who wrote (28645)	10/7/1999 2:40:00 PM
From: Jacob Snyder	Read Replies (2) \| Respond to of 99985

re: when rising interest rates slow the market: I've been looking at a graph of 10Y treasuries, for the last 10 years. Rates bottomed in Oct. 1998 at 4.5%, and have since climbed 1.5%, to 6.0%. Is this enough to pull stock prices down? Well, the largest upward move in the last 9 years was from late 1993 (bottom at 5.3%), to late 1994 (top at 8.0%). That's a 2.7% increase. Not by coincidence, 1994 was the only year in the last 9 when stocks didn't do well. In 1994, earnings went up, PEs came down (S&P 500 ended 1994 at a trailing PE of 14, about half today's level), and stocks were flat overall. So, using the 1994 move as a yardstick, it seems that a 2.7% move is enough to compress PEs. Of course, if earnings are up enough, you can absorb some PE compression and still do OK. The only other significant up move in rates happened in 1996, when rates made a 1.2% move, from 5.7% to 6.9%. But, that year, market PEs increased, and stocks did very well. So, 1.2% wasn't a big enough move to affect stocks. In order to make as big a move as happened in 1994, 10Y treasuries would have to make a further move up of 1.2%, to 7.2%. Is that going to happen? My guess is, yes, but it will take a while. In fact, it might take till after the next election. I don't think rates are going down, but they may bounce around at about the 6% level for a long time, before heading up. BWDIK. Anyway, this may indicate that, in the presence of very strong earnings (big caveat), present interest rates are not enough to stop the market's momentum. And the momentum guessers are still irrationally exuberant. The Fed has raised twice, and said it will probably keep on raising. The market gets scared, from 2:02 till 3:30 yesterday. Then they get over it, and go back to bidding up Yahoo. Let's look at this market leader: it announces quarterly earnings of $0.14/share. Well, not really. Actually, if you take out the big-one-time-only-charge (like many companies,they have one regularly), they only made $0.05. Annualize those (unadjusted by the creative accountants) earnings, and the PE is 945. With leadership like that, what can go wrong? BWDIK.