Both Sides

The short term bull and bear cases are quite simple and both have merit. The bears will say the S&P 500 has shot up a very quick 70+ points. Even in the context of an uptrend we could see a pullback of a couple of percent, never mind if this is just a dead cat bounce.

The bulls will counter that despite this huge rally bearish sentiment is still extreme and most are still fighting this rally. In past years strong uptrends have kicked off with tremendous rallies. Most prominent is the rally that started off 666 in the S&P 500 and last Summers rally that started in late August. In both instances the rally was  as sharp as this one and the market never looked back.

I see both sides of this argument which is why I am largely out of my shorter term longs but holding on to my core positions.

1 comment:

frank r said...

I bumped up from 35% stocks to 40% when the SP500 dipped under 1100 Tuesday. My plan is to go 100% stocks at the right price, and then stay there indefinitely (I'm retired and can live off dividends and I'd rather be 100% stocks when the inflation starts, as it surely will eventually), but I don't think 1070 is as low as we'll see. So I'm waiting for better prices, since this will be my last chance at extracting alpha from investing.

I estimate SP500 fair-value at about 1125 (trend-line earnings of 75 and PE of 15), though it is quite possible trend-line earnings will be less than 75. Earnings right now are being inflated by the trillion dollars+ budget deficit. A large percentage of newly printed money pases through corporate profits on its way to the pockets of the wealthy, where it comes to a final rest. Eliminate the budget deficit, which must happen eventually, and profits will tank. Future inflation will also play havoc with real profits, due to its effects on taxes, depreciation and inventory calculations. There is also the possibility of ferocious future competition from Chinese corporations, that might drive down profits for US corporations. The bull case is there is worldwide surplus of capital versus labor, so that returns on capital should be high looking forwards. The bear case is capital owners will plow all their profits into excess capacity so as to destroy those returns. This is exactly what the Japanese did and what the Chinese are doing now in certain sectors. There is talk that the Japanese are finally mending their ways in this regard, and supposedly the Chinese will mend their ways too as the labor force there shrinks, but I have my doubts. Oriental culture might be fundamentally different from ours in this respect. Even some American corporations are addicted to capital-destroying investment (you discussed CA and HPQ and other tech companies doing just this in one of your recent posts). So fair-value might be as low as 1000 (67 * PE of 15). And nothing says the market won't go below fair-value. So why not take a chance and wait for it to do so?

I think a lot of long-term buy-and-hold types are thinking like me. That is, waiting for better prices. You could interpret this buillishly--lots of support at some price. But there is also a bearish interpretation. Inflation looms in the future, but not in the immediate future, so hanginthe market.g out in cash for a year or two waiting for stocks to go down is not that painful. That is, we're not anxious to buy, so the wait could be along one.