Thursday, February 7, 2008

Technical Thursdays: Is This How Bear Markets Are Supposed To Start?

The bears (and many bulls) are convinced that stocks in the US are in a bear market. However, if this is a bear market then it has to be off to one of the oddest starts in memory. Consider the above three images*, the first two show the performance of the styles (mega, large, mid, and small) across the size spectrum and the third is a table of relative values.

* The first chart above shows the relative price performance of the four size categories – mega, large, mid, and small.
* The second chart above compares across the size spectrum, large, mid, and small, from a style perspective - growth.
* Finally, the third image is a table that compares the P/E and PEG ratios of the large, mid, and small cap groupings.

Investment Strategy Implications

Since the aggressive monetary policy response of the past two weeks by the Fed, what looked like the beginning of a performance gap within the size styles has come to an abrupt halt. Granted it may resume with the mega and large caps outperforming the Smids on a sustained basis, but I suspect that will turn out to be wishful thinking by the bears and an unreasonable fear among the bulls. The reason for this conclusion lies in the real economy of earnings and valuation - The Smids are just not overvalued relative to their big cap brethren. Moreover, there is more than a reasonable chance that the earnings collapse necessary to match up to the valuation levels that current market prices are predicting (-20%) may prove to be overly pessimistic (see Expected Return Valuation Model in this week's report**).

If the equities markets have entered a bear market, they are sure off to an odd start.

*click on images to enlarge
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1 comment:

NewstraderFX said...

Hi. I enjoy reading your blog very much and I would like your opinion on something.

I'm looking at a daily line chart of the S&P 500 using a 5,3,3, slow stochastic with simple moving average method.

The stoch indicated an oversold condition on Jan 22 and is now indicating an oversold condition as of Friday's close, which is at a higher price.

In my experience, when the stoch indicates an oversold price that is higher then where price was previously, that is supportive for an uptrend in price.

Of course, the market is volatile now and is very vulnerable to a new shock, but absent a new set of negative circumstances, it does look like the potential for a rising S&P 500 is there.

Morgan Stanley: "As the stimulus from the tax cuts and massive Fed easing filters through, the US economy should get a lift in the summer, and our US economics team is forecasting a healthy 4.5% annualized growth rate in the Jul-Sep quarter. That would make for a mild and short-lived recession in the US."

Your opinion would be greatly appreciated. Thanks in advance.