Stocks have been in the overvalued end of the normal P/E range since
the early-1990s, and this condition shows no sign of abating. Below is
an excerpt from our daily earnings summary that will offer readers a
better perspective. I have outlined the 2009 Q4 results because that is
the first quarter not distorted by the huge loss reported in 2008 Q4.
While the results of the current quarter are not final, 90% of
companies have reported, and I don't think there will be any surprises
from the remaining companies sufficient to change the estimated results
a substantial amount. As you can see, valuations are projected to be
well above the overvalued limit of the range (P/E of 20) through the
first two quarters of 2010. If the market continues to rally, the over
valuation will persist into the foreseeable future.
Since price movement over the last two decades seems to have little
relationship to P/E ratios, why pay any attention to values? In fact,
Decision Point's trend-following models consider price movement and
nothing else. Nevertheless, we still want to be aware of the condition
of the fundamental foundation of the market, and we believe that
investor ignorance in this regard will only lead to more pain. After
all, investors have been ignoring valuations for nearly two decades,
and the result has been a stock bubble and two major bear markets. Most
have not fared well during this period.
At each price top for the last two months I have been expecting
a correction to begin, yet price declines have been relatively small
and each top is followed by a higher top. Frustrating! I am not trying
to identify a shorting opportunity, because shorting is not recommended
during a bull market. The only reason that a decent correction is
important is that it will provide a lower-risk opportunity to open new
long positions.
For two weeks the market has been rolling over into what could
be another short-term top. Or it could be the beginning of the
long-awaited correction. Negative divergences still abound, but, as I
told a subscriber, these conditions are usually not too serious in a
bull market. The market is vulnerable, but it is not a time for
shorting. We could reasonably expect the rising wedge pattern to break
down, but you can see that there is support just below the wedge.
Bottom Line: Market P/E tells us that there is no fundamental
foundation under the market. This information is not useful in timing
decisions, but it does tell us that there is more pain ahead in the
long-term. In the short-term the market is topping again, and a
correction is still possible.
