I’m not sure I agree with very much in this NYT article, describing the current cyclical bull rally wihtin the longer secular bear market as A Rally That Needs More ‘E’.

“In the first leg of a bull market, when optimism and euphoria are ascendant, investors are willing to bet that the economy will improve and that corporate profit growth is just around the corner. This faith manifests itself not just in rising share prices, but also in rising price-to-earnings ratios.”

I do not believe that this is a) the first leg of a bull market; b) optimism or euphoria are are ascendant; c) investors are betting that the economy is improving.

Rather, this has been a technically driven rally from very deeply oversold conditions. A 6 month, 5,000 point fall will set up the conditions that lead to a massive oversold bounce.

Indeed, the article notes that “the P/E ratio for companies in the Standard & Poor’s 500-stock index has soared 87 percent since this rally began on March 9.” That is not what a typical bull market looks like, and is more accurately described as the reaction to a prior collapse.

“Though conventional wisdom assumes that P/E ratios continue to grow throughout a bull market, that’s not always the case. In fact, it’s rarely the case.”

Well, it may be rare, but it was certainly the situation the 1982-2000 — the greatest bull market of our lifetimes. About 75% of the gains took place due to P/E expansion. The end of that rally (’98-’00) saw P/E rations expand dramatically, especially on the Nasdaq.

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Source:
A Rally That Needs More ‘E’
PAUL J. LIM
NYT November 28, 2009

http://www.nytimes.com/2009/11/29/business/economy/29fund.html

Category: Earnings, Markets, Technical Analysis

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

12 Responses to “Is Profitibility or Technicals Driving Equity Markets?”

  1. call me ahab says:

    BR says-

    “Well, it may be rare, but it was certainly the situation the 1982-2000 — the greatest bull market of our lifetimes. About 75% of the gains took place due to P/E expansion.”

    no doubt- and that it took place during a period of unprecedented debt creation- should be a clue that it was phony prosperity behind the great “Bull”-

    always remember- “it’s different this time”-

    you say it often enough and long enough and it’s like mass hypnosis- that we have brain dead business reporters working at places such as CNBC-

    that buy it all- hook line and sinker- without question- at the first utterance-

    does not help educate a gullible public- but possibly- with enough self induced Wall Street disasters- the public will remove themselves from the stock market medicine show and invest in safer assets

  2. call me ahab says:

    CNBC headline-

    “Cash In Now Or Wait For A Santa Rally?”

    only from the best in business reporting-

    what are we 4 year olds? It’s only people’s investments we’re talking about- but I guess I will just stick my thumb in my mouth and pray for Santa to come through

  3. Pat G. says:

    “Driving Equity Markets”? No interest being paid on deposits, savings, Treasuries or CDs, easy money, ZIRP, liquidity and carry traders. While cost cutting (firings) positively effects the bottom line of most companies, you can’t really believe that continuing to cut the consumers throat is a recipe for financial success forever…

  4. Steve Barry says:

    Stats can be misleading and manipulated…but sometimes they tell the whole story. This is a low volume cyclical bull, to such a degree that it is an outlier in the data of how far it has gone combined with its low volume, per Bill Hester from Hussman Funds:

    http://www.hussmanfunds.com/rsi/PhoenixVolume.htm

  5. BuffaloBob says:

    “with enough self induced Wall Street disasters- the public will remove themselves from the stock market medicine show and invest in safer assets”

    ahab, I love that line. It seems to describe the current situation precisely.

  6. wally says:

    Perhaps there is another factor beside profitability and technical reasons?

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  8. dougc says:

    P/E expanded during the 1982 to 2000 bull market, also interet rates and inflation fell, the consumer wasn’t overextended, and new technologies drove the economy and high quality jobs were plentiful. Not sure we are in a comparable period.

  9. I’m thinking the trillion dollar deficit had something to do with it.

    They had to go somewhere. They seem to have petered out.

    ……next….

    BTW, I’m reading the Sirens of Titan right now. This is a market Vonnegut would have loved

  10. van schaik says:

    We are definitely not in a comparable period now. The Great Bull Market of 1982 – 2000 was ignited by a long term interest rate peak which broke the dominant mood of the inflationary 1970′s, very similar to the interest rate peak in the early 1920′s which was the response to the inflation of WWI. The 1920′s also saw a major bull market in stocks, followed by a major contraction of economic activity. The markets are not similar in macroeconomic motivation, but the bottom of the Great Depression was still a great time to buy stocks. It was a great time to buy because the overreaction to the sell side took the market back to where it stood at the beginning of the bull market. I just don’t think we’ve reached the bottom of this contraction quite yet. We’ve still got some more reacting, and overreacting, to do. http://jpetervanschaik.googlepages.com

  11. Joseph Martinez says:

    The question is weather or not you believe that we are in a secular bear market that start around 2000.
    If you believe that we are in a secular bear market then you have to ask yourself to what effect did the credit bubble have on this secular bear market. Besides taking down the financial system and changing the way we down business the collapse is causing the boomers to work longer then they have planned. The boomers who are working longer will not being spending their money the way they have in the past. It is how the time to save and make up for the lost ground. This is the reason why we are seeing a lot of money of the sidelines. The boomers who have seen their investments collapse have also had their risk tolerance collapse.
    This will cause a ripple effect on employment for generation x and y as we are already seeing that they are the hardest hit in the unemployment lines. The money that generation x that would be putting back into the economy if they were employed or fully employed is not there. This will extent the secular bear market beyond its normal life span.
    This gives reason why the Feds have done to much to save the system. If the Feds believed that we are in the middle of a secular bear market they they would known that they have done enough to “save the financial system” with the TRAP and TALF programs. That interest rates need to be raised to 5% and the financial system can be fixed over the next ten years.
    The year 2009 is not going to be the year when the market heads back to equilibrium.

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