Best of the Week
Most Popular
1. Investing in a Bubble Mania Stock Market Trending Towards Financial Crisis 2.0 CRASH! - 9th Sep 21
2.Tech Stocks Bubble Valuations 2000 vs 2021 - 25th Sep 21
3.Stock Market FOMO Going into Crash Season - 8th Oct 21
4.Stock Market FOMO Hits September Brick Wall - Evergrande China's Lehman's Moment - 22nd Sep 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
7.AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
8.Why Silver Price Could Crash by 20%! - 5th Oct 21
9.Powell: Inflation Might Not Be Transitory, After All - 3rd Oct 21
10.Global Stock Markets Topped 60 Days Before the US Stocks Peaked - 23rd Sep 21
Last 7 days
Dow Stock Market Trend Forecast Into Mid 2022 - 4th Dec 21
INVESTING LESSON - Give your Portfolio Some Breathing Space - 4th Dec 21
Don’t Get Yourself Into a Bull Trap With Gold - 4th Dec 21
GOLD HAS LOTS OF POTENTIAL DOWNSIDE - 4th Dec 21
4 Tips To Help You Take Better Care Of Your Personal Finances- 4th Dec 21
What Is A Golden Cross Pattern In Trading? - 4th Dec 21
Bitcoin Price TRIGGER for Accumulating Into Alt Coins for 2022 Price Explosion - Part 2 - 3rd Dec 21
Stock Market Major Turning Point Taking Place - 3rd Dec 21
The Masters of the Universe and Gold - 3rd Dec 21
This simple Stock Market mindset shift could help you make millions - 3rd Dec 21
Will the Glasgow Summit (COP26) Affect Energy Prices? - 3rd Dec 21
Peloton 35% CRASH a Lesson of What Happens When One Over Pays for a Loss Making Growth Stock - 1st Dec 21
Stock Market Sentiment Speaks: I Fear For Retirees For The Next 20 Years - 1st Dec 21 t
Will the Anointed Finanical Experts Get It Wrong Again? - 1st Dec 21
Main Differences Between the UK and Canadian Gaming Markets - 1st Dec 21
Bitcoin Price TRIGGER for Accumulating Into Alt Coins for 2022 Price Explosion - 30th Nov 21
Omicron Covid Wave 4 Impact on Financial Markets - 30th Nov 21
Can You Hear It? That’s the Crowd Booing Gold’s Downturn - 30th Nov 21
Economic and Market Impacts of Omicron Strain Covid 4th Wave - 30th Nov 21
Stock Market Historical Trends Suggest A Strengthening Bullish Trend In December - 30th Nov 21
Crypto Market Analysis: What Trading Will Look Like in 2022 for Novice and Veteran Traders? - 30th Nov 21
Best Stocks for Investing to Profit form the Metaverse and Get Rich - 29th Nov 21
Should You Invest In Real Estate In 2021? - 29th Nov 21
Silver Long-term Trend Analysis - 28th Nov 21
Silver Mining Stocks Fundamentals - 28th Nov 21
Crude Oil Didn’t Like Thanksgiving Turkey This Year - 28th Nov 21
Sheffield First Snow Winter 2021 - Snowballs and Snowmen Fun - 28th Nov 21
Stock Market Investing LESSON - Buying Value - 27th Nov 21
Corsair MP600 NVME M.2 SSD 66% Performance Loss After 6 Months of Use - Benchmark Tests - 27th Nov 21

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Stock Market Investor Sentiment Indicators At SubNormal Levels

Stock-Markets / Stock Market Sentiment Aug 06, 2010 - 01:39 PM GMT

By: Richard_Shaw

Stock-Markets

Best Financial Markets Analysis ArticleDavid Rosenberg, in his daily letter, presented some interesting sentiment statistics in perspective of historical values during good and bad times. The implication is that there is a major disconnect between bullish comments about the economy by some experts and the view of the people where the rubber meets the road. He combines that information to suggest that the S&P 500 is substantially overvalued.


The Statistics (quoted from his letter):

"The University of Michigan consumer sentiment index — currently at 67.8 in July — is the lowest since November 2009. What is the average during recessions? 73.8. What does it average in economic expansions? Try 90.9. So you tell us where we are in the cycle.

Ditto for the Conference Board consumer confidence survey. It was 50.4 in July — a five month low. The average during recessions is 70.4, and 102 in expansions. In other words, it is still 20 points below the recession averages.

The National Federation of Independent Business small business optimism sentiment was 89.0 in June — a three month low. The average during recessions is 91.9. The average during expansions is 100.2. Again, you be the judge."

His View On S&P 500 Valuation:

With the index consensus 2011 EPS at about $76, and the subnormal sentiment levels, Rosenberg suggests an appropriate multiple for that expected level of earnings would be 10X to 12X. He didn't do the multiplication, but it comes out as $760 to $912. Those levels are about 20% to 33% lower than today's S&P 500 price level.

Key proxies for the index are SPY, IVV and VFINX

Some Important Counter Arguments:

The way people feel, and the earnings of companies, are not necessarily directly proportional, particularly if the companies earn money globally and the sentiment is measuring in a single country.

Earnings have certainly improved greatly over 2009 and 2008, and operating earnings (before write-downs and other special charges) are predicted to be high. P/E multiples reward growth and absolute earnings levels.

Europe seems to be working out its sovereign debt issues.

Emerging market economies are growth at a pretty good clip.

Some Counter-Counter Arguments

Sentiment and spending behaviors in the US are important ultimate drivers of earnings for companies with large sales components arising from the US.

Analysts may have a tendency to extrapolate earnings trends sometimes too far.

China seems to be slowing (still fast, but slower).

Accommodative Federal Reserve policies persist, and US legislative and executive decisions are hard to predict, except that they will substantially change.

Interest rates continue to decline (bonds and stocks probably can't both be right).

The Dynamic Indecision Range:

These sorts of opposing views and supporting information have put the S&P 500 into a tense range of indecision that is approximately the range defined by the precipitous crash in 2008.

There will be resolution eventually, but that resolution could be a movement above or below the indecision range. We are still very much dependent of government tax and fiscal policies, and central bank interest rate and quantitative easing decisions.

Our Current Approach:

We don't claim to know which way the trend will develop. We tend to be a bit bearish short-term, but have generalized faith in the capacity of major major companies to prosper, which makes us bullish long-term

Our approach was to exit all equities in the first half of 2008 (losing some money, but not participating in the crash); keeping equity allocation in reserves until June-July of 2009; exiting European equities in 4Q 2009; exiting emerging market equities in 1Q 2010; and exiting US equities in May of 2010. At this point we are partially reinvested in equities (20% to 25% of equity allocation committed, with 75% to 80% of equity allocation still held in reserve). The portion of equity allocation that we have re-risked is in higher yielding, up trending equities in the US; and in up trending emerging market country funds.

We are looking for opportunities to commit more, but want to see price trend "proof" first. In a market as fragile as this one, with so many government factors, we are concerned about "value traps" that could result by trying to pick undervalued stocks. We are trend followers generally, anyway, but feel we need to be all the more strict in seeking demonstrated trends before risking capital under current conditions.

ETFs Cited: SPY, IVV

Holdings Disclosure: As of August 5, 2010 we do not own any securities mentioned in this article in any managed accounts.

By Richard Shaw 
http://www.qvmgroup.com

Richard Shaw leads the QVM team as President of QVM Group. Richard has extensive investment industry experience including serving on the board of directors of two large investment management companies, including Aberdeen Asset Management (listed London Stock Exchange) and as a charter investor and director of Lending Tree ( download short professional profile ). He provides portfolio design and management services to individual and corporate clients. He also edits the QVM investment blog. His writings are generally republished by SeekingAlpha and Reuters and are linked to sites such as Kiplinger and Yahoo Finance and other sites. He is a 1970 graduate of Dartmouth College.

Copyright 2006-2010 by QVM Group LLC All rights reserved.

Disclaimer: The above is a matter of opinion and is not intended as investment advice. Information and analysis above are derived from sources and utilizing methods believed reliable, but we cannot accept responsibility for any trading losses you may incur as a result of this analysis. Do your own due diligence.

Richard Shaw Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in