Grazie Ditro
oggi poco entusiasmo e quindi mi dedicherò alle letture...
The financial press has been grim, with frequent mention of bear markets and crashes. While in the home gym this morning, I saw a CNBC presenter read an email asking if a guest host was concerned about parallels between today's stock market action and 1929?! This widespread pessimism is a contrary indicator, telling us that we have already seen the worst of the correction for many markets.
Valuations Have Improved
Incidentally, the guest host's response to the email question immediately above was that we would not see a crash, unless central banks did something unconscionable, because valuations were reasonably attractive. I agree: the UK's FTSE 100 has a p/e ratio of 15.83 and a yield of 4.21%. These valuations will probably improve somewhat further but are not the precursor for a crash. And here are a few other valuations, listed with the current p/e followed by the yield: Russia's RTSI$, 7.28 and 2.35%; Germany's DAX 12.58 and 3.32%; France's CAC, 12.50 and 3.03%; India's NIFTY 50, 14.45 and 1.90%; Thailand's SET, 9.57 and 4.55%; South Korea's KOSPI, 10.48 and 1.94%; Australia's AS51, 16.56 and 3.94%; Brazil's IBOV, 9.61 and 5.10%; Mexico's MEXBOL, 9.46 and 1.61%; South Africa's JALSH, 9.34 and 3.32%.
Wall Street's valuations have improved in recent years, in line with its secular bear market, long defined here as a generational-long process of valuation contraction. However they are still on the pricey side compared to the stats above and for many other markets around the world: S&P 500, 16.47 and 1.92%; Dow, 20.06 and 2.37%; Nasdaq Comp, 43.27 and 1.17%! However Wall Street is generally low beta, so just as it underperformed on the upside, it now offers some downside cushion.
Optimism Followed By Fear, Apathy Next
So the behavioural clues are more favourable, valuations have improved and are quite attractive in some instances, but stock markets will have to face the Damoclean Sword of rising interest rates for a while longer. Therefore while we have most likely seen the worst of the correction, it would be premature to assume that markets have reached sustainable floors. And needless to say, any such assumption is not supported by the all-important technical evidence. There are reasons for this:
The leveraged long-side momentum players are now mostly out of the market and unlikely to return in volume until the next uptrend is apparent. The rapid sell off commencing in May caught many investors by surprise. Consequently they have stale bull inventory and would welcome the chance to lighten positions during a rally. The people with cash are in no hurry to invest.
Consequently rallies over the next few weeks will be brief and consist mainly of short covering. However assuming that central banks are one or perhaps two more rate hikes away from calling it a day, although promising to remain vigilant (what humbug) and declaring a tactical victory against the inflation they created, I assume that we have already seen the worst of the selling.
Therefore, a fright or two aside, stock markets should soon morph from terrifyingly exciting to stolidly boring. We are approaching the apathy phase, during which markets will convalesce for a few months, building a sustainable floor in the process. Investors' psychological wounds will mostly heal during the apathy phase. For you and me, this will be a good time to prepare our shopping list for the 4Q 2006 buying opportunity.