STOCKS UNDER OR OVER VALUED?
Zero Hedge had this yesterday and I think it is interesting. You can see it came from one of the dark over lords Morgan Stanley. There is a lot of talk now about how stocks are very cheap by historical standards and as a result are going to ramp up in price from here. I am a believer in timing stock market swings at extremes with earnings ratios in general. In general is the operative phrase. What I want to do is buy when prices are low and the ratios show under valued levels, and sell or go flat at high points, where stocks are over valued. I have not found any evidence in my research over the years to support buying at extended price levels on the high side regardless of whether or not earnings measures may or may not be valued correctly.
What I like about this chart is that it focuses on Forward P/E's. I have found that measure to be one of the two best of all the measures for doing this type of thing. For every egg head who comes up with something like this there is another showing another stat with the reverse, supporting a buy here. I think at some point you have to step back and just think using basic logic. By any measure the stock market is extremely extended during this rally, we are at all time highs basically. Is it really logical to believe that stocks are under valued at such a price juncture? Not in my mind.
I went through some statistics in my Newsletter this month about this time of year with the stock market that also do not support a new long position being put on here, and why. If we pair this with the horrible NFP report with the absurd doctoring of the head line number with the participation skit, it has never been more clear that there is a huge divergence building here. We then have the story break about the trader who was supposedly controlling 20% of the ES on any given day. There seems to be a preponderance of events now taking place telling us to look out.
I always focus on price and from that stand point we do not have sell signals yet from a broad perspective. We once again saw the PPT bring the market back from the brink yesterday, and this has become business as usual. It is a shame that something like this is so widely accepted by the public. I never would have thought 10 years ago that the public would be so accepting of this level of government intervention into our lives. From that perspective it is different this time. The proposed changes by BO with retirement accounts are the next step in the re-distribution plan. It is becoming as clear as day that his policies are wrecking this country and I am now getting a little worried that the fall from all of this is going to be sooner than later. When I see his proposed budget adds $7 Trillion to the debt, I am beginning to think now he is doing this intentionally to bring us to our knees. I thought before he was just so set in his ways and was stubborn, but there is no way with the advisors he must have including Soros, that he does not know his plan is going to bring us down. As a result the only conclusion I can come to now is that it is deliberate.
What does all of that editorial stuff have to do with trading? We cannot just go run and hide or blindly short the market because we think politics are leading us astray. The last few years have shown what a mistake that can be. However, it does tell us from a bigger picture perspective, that we may have a monster short trade to be had out there on the horizon. Catching it correctly is never going to be easy because of what the FED is doing with yesterday being a great example. We had the real reaction happen pre-open, then the governments reaction once the pit session hours kicked in. If you are inclined to try and catch this short I think you have to be willing to probe a few times and get kicked around a little. This is not easy to do from an emotional stand point. I am going to be looking for a short entry on a bounce from here now.
I wanted to show a chart of a trade we are currently in with the Swing signals to illustrate how we are trying to ride trades for a big longer. We got long on March 25th in this trade and have been trailing a stop up since that time. I have one possible short term target on the chart that I judged was too close and we should try for more than that amount. I do use discretion in these trades. In this case that turned out to be a good call since we zoomed through that level. You can see we traded in sync with the highlight bars showing green for a buy where we entered. I would love to say those highlight bars are the holy grail but they are not, not even close. They just give me a general idea of where the trend and momentum line up and the direction the large moves should go. In choppy markets they can go back and forth but tend to do so less than some of the other things I have used over the years.
We are going to be taking profits here shortly since we have had some range expansions especially yesterday. The PPT took a little back from us when they reversed the stock market late.
This coming week should be interesting, hopefully we get a bounce to sell. I hope everyone enjoyed the Newsletter I think it is imperative to get the stock market right and so far I have been dead on with it. Timing the long exit and or short is going to be key going forward.
Have a great weekend