Stocks Fit the Pattern
So September starts with a bang and our inverted head and shoulders pattern remains intact. This is almost exactly what I suggested might happen back in July. We'll see if it continues to play out this way. Stay tuned…
This blog is syndicated from "Jesse Felder's My Back Pages"
I Read the News Today, Oh Boy: Bank Trust FAIL
- Fleck: "I wouldn't own a financial stock with a gun at my head." – Business Insider
- More than a 10% banks remain at risk of failure even as indicators show some nascent signs of revival - WSJ
- Is Pennsylvania's capital only the beginning of a wave of muni defaults? – WSJ
- The Cult of Equity is dead. Long live bonds. – FT
- Face It, Nobody Is Bullish Anymore… – Business Insider
- …Except the Insiders – MarketWatch
- Why Labor Day Is the Best Time to Buy a Car – NY Times
For links like these in real time follow me on Twitter.
By One Measure Stocks Are Cheapest In Over a Half Century
There is a vociferous ongoing debate about current stock valuations. Some argue that stocks are "dirt cheap" while others flatly disagree.
To illustrate, below is a chart of the price-to-earnings ratio of the S&P 500 using an average of its trailing five year earnings, my preferred method (data from Robert Shiller):
By this measure, stocks currently trade at a p/e of about 20, just above their 50-year average of roughly 19. Certainly this does not mean stocks are cheap.
However, everything is relative and comparing stocks' earnings yield (earnings divided by price) to that of the 10-year treasury bond we see a very different picture. The chart below plots the ratio of these two measures back to 1960:
As the chart demonstrates, for the first time in over 50 years the S&P 500 sports an earnings yield more than twice that of the 10-year treasury bond. Thus investors can safely say that stocks, relative to bonds, are indeed very cheap.
I Read the News Today, Oh Boy: Why I’m Buying a Porsche
- Classic Cars Beat S&P 500 – The Big Picture
- Stock Market Bulls Are Nearly Extinct – The Big Picture
- The Case for Economic Optimism – WSJ
- Investors Might Hate Stocks But They Love Their 2.5% Long Bonds – Bloomberg
- Scapegoating For-Profit Colleges – WSJ
- ETFs Are Not Created Equal – Felix
- Why Working at Home Is Both Awesome and Horrible – The Oatmeal
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Charting a Course For Stocks
So stocks are once again trading back to the all-important 1050 level on the S&P 500, the neckline of the head and shoulders pattern everyone and their mom was watching last month.
What's interesting about this test is that another head and shoulders pattern has formed in the meantime – this time inverted (bullish) – and far fewer traders are taking notice:
This chart, along with the growing aversion to equities, has me feeling more bullish right now.
However, the pennant I've been watching for the past few months has just broken down:
I've been looking to this chart which plots the relative performance of the financials to give some hint at the future direction of stocks for some time.
Its recent breakdown makes me a cautious bull. I'll still be watching it over the near term to see if it can pull off a reversal. This and the Dollar Index to see if the rally over the past couple of weeks is for real (which would be bearish).
Because it's do or die right now for both bulls and bears. Break them down below 1050 or hold it and reverse higher. What happens right here right now lays the groundwork for the rest of the trading year.
‘The Bigger They Come…’
Values obviously did not climb nearly as fast as prices did during the boom. Because the regional population is still growing, however, it is very possible that true values are still climbing. Prices are another story: the chart above represents just how far prices have come since topping out in 2006. The Bulletin reports:
Housing values in Bend have dropped at a higher rate than in any other metropolitan area in the nation during the past year, according to real estate website Zillow.com.
Bend's median home price fell by 21.8 percent, to $167,500, from the second quarter of 2009 to the second quarter this year. Values have dropped 52.5 percent in Bend since the peak of the market in mid-2006, when the median price was $354,000, according to Seattle-based Zillow.
This begs the question, 'have prices and true value approached some sort of parity yet?' Well, according to IHS Global Insight who maintains the most thorough database I've found (and who dubbed Bend the most overvalued market in the nation at the top of the real estate bubble), as of the end of last year, Bend's home prices were still 2.3% overvalued. That's close enough to fair value for me.
That's not to say that this is "the bottom," though. Prices can and usually do decline well below fair value after a bubble bursts. Still, we've come a long way in working off the massive excess in local home prices and current buyers can feel good knowing that they are no longer paying a premium above fair value.
Porsche Wins Pikes Peak Hillclimb
This is an awesome, in-car video of Porsche driver Jeff Zwart’s winning Pike’s Peak run. It’s amazing how calm and steady this guy is. I’d be all over the road:
via youtube.com
(Hat tip, B)
(Hat tip, B)
I Read the News Today, Oh Boy: Business Name FAIL
- Business Name FAIL - FAIL Blog
- Is This A Blip, Or Is Stock Ownership On A Permanent Decline? - Business Insider
- Individual Investors Are Still Behaving Badly - NY Times
- Oregon shuts down 7-year old's lemonade stand in the name of public safety (your tax dollars, hard at work) - Business Insider
- Is Big Blue Flashing a Bond Warning? - WSJ
- Deleveraging chronicles: consumer credit declines in June. - Calculated Risk
- WedLock: The World's First Divorce Insurance Product - NY Times
For links like these in real time follow me on Twitter.
