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Strategies & Market Trends : Waiting for the big Kahuna -- Ignore unavailable to you. Want to Upgrade?

To: Real Man who wrote (55392)	9/27/2001 11:53:37 AM
From: Oeconomicus	Read Replies (1) \| Respond to of 94695

Yes, I know. You're calling for single digit PEs on negative earnings, right? ;-)

To: Real Man who wrote (55392)	9/27/2001 12:52:32 PM
From: TRINDY	Read Replies (2) \| Respond to of 94695

Vi--I, too, have been very negative on the stock market. There was a bubble, no doubt. The question is, "To what extent has that bubble evaporated?" I think there is considerable evidence that the bubble has evaporated. Indeed, by one measure I have constructed, we are now negative to the 1980-1993 trend. I have daily data for the major indices back to 1980. I regressed ln(Y) = a + bTime, were Y is a stock index, ln is the natural log, and Time represents integer values (1, 2, ....). Using the S&P 500, the pre-bubble trend indicates an average annual growth rate of about 11 percent in the index over this period, which by the way, contains two recessions, one of them quite major ('81-'82). This 11 percent per year annual rate of increase is a result found in many other studies. This pre-bubble trend can then be extrapolated to present day. I find that the S&P 500, as of yesterday's close, is now -14.6% below that extrapolated trend. The largest negative gap was -27.6% which occurred on 8/12/82, toward the end of that recession. The largest positive gap was 53.2% on 7/16/99. At that time, the S&P was about five years ahead of the 80-93 trend. I call that a bubble. But, now, we are more than a year below that trend. I say that means that the bubble has vanished. This doesn't mean that we have seen the lows. But I think it does mean that we are getting close. Incidentally, the largest the gap got during the '90-'91 recession was -15.7% on 10/11/90. We have already been at -18.0% on 9/21/01. The Nasdaq is somewhat of a different story. I have data from August 88 on daily Nasdaq Composite prices. The 88-93 trend yields an annual average gain of nearly 13 percent (12.92 to be more exact). Extrapolating this trend to present day, we are currently -25.6% below the extrapolated trend. Thus, we are two-years of average gains below trend at present. The minimum value for the 88-present is -31.2%, which occurred on 10/17/90. The maximum value was 213.0%, occurring on 3/9/00. Now, I call that a real bubble with a gap equal to almost nine years of average annual gains. I treated this bubble appropriately, riding up the irrational exuberance and then getting out. I am getting back in gradually, now. I think we are near the lows and nobody gets the last penny. Two important questions still plague me: (1) Even though we may be near the bottom, is there still any reason to expect stocks to rally?; (2) Does the fact that we experienced a bubble mean that we have "dues to pay" for that excess, which may take stocks down considerably more than justified by a classical recession? I wish I knew the answers to these questions. But, the magitude by which the Fed is pumping, and the fact that inflation continues subdued, lead me to take a positive stance here. Another fact: The broadest measure of stocks, the Wilshire 5000, is currently about 89% of GDP. That, too, causes me to be somewhat positive. These are tough times, no doubt. And they may continue and worsen for some time. Nevertheless, my belief is that the evidence suggests that now is the time to be accumulating. Thanks for your continuing contributions. I enjoy reading them. Cheers!