DOW down 1500+ points this week

[Johnny2X2X]

I've really been astonished that the markets haven't completely collapsed. I understand money has been injected into them by the Fed and investors maybe don't quite know where else to put their money right now, but a DOW at 24,000 with what's been going on economically is absurdly over priced. S&P future earnings vs price index was 22.5 yesterday, the highest it's been in 50 years.

We crashed below 18K, and then we saw a run up to almost 25K that made no sense. The math on valuations still puts us at a DOW between 15-16K, that's what it "should" be at.

What can people with 401Ks do? Well hopefully you were at a 60-40 mix, if so that 40% in bonds has shielded you from a lot of the losses. If you were at 80-20, you won't fare as well, but you'll still come back.

In February, I went to a 50-50 mix. That's now a 20-80 mix as when I've seen a high point I sold off a little more equities and bought more securities.

Whatever you do know that it will come back eventually.

[empedocles]

1. Some believe that the markets react directly to 'the news'.

The big money bets on getting ahead of what other market buyers and sellers will do.

In this market, pension funds for example, are locked [by mandates, investment committees that decide portfolio policies, etc.,] into permanently bullish policy positions. Yes, they can shift some percentage into bonds from stocks, as some have done somewhat, but that's about it. This is a significant, known factor, and provides a base, for buying at say DJIA 20,000, knowing the locked in portfolios.

An example, which you might test for yourself, is the gold market. Smart money knows that gold goes down in US deflations. However, smart money knows that in a market downturn or scare, some 'sheep' buying sectors will buy gold 'because its good to have in bad times. If the smart money sees some gold upticks from the low info buyers, they will try and buy ahead of those predictable buyers - and sell short ahead of them. Pretty sure that gold will top out, the sheep shearers maximize for them the market tops, and sell short to maximize when gold comes down.

"Stock Market "Sheep" & Stock Market "Shearers"
By Dr. Winton Felt [stockdisciplines.com]

"A stock market sheep will say, "this is a great company. I think I'll buy some shares in it." Then he waits for a year or two while the stock moves like a slug. Perhaps he bought it at $50 a share. He holds on while the stock makes a long slow decline to $35. At this point, many sheep would not be able to "take it" any more and they would sell to their "shearers." . . . ' . . . "

At a top point, sheep investors will hold. Smart money, so long as money velocity, other deflationary signals hold, take bear positions in gold. A classic example; there was a gigantic gold bubble inflation building towards 1980. Many buyers held, or bought in the gold bubble trap near 1982. However, smart money knew that was being sharply reined in by 1979 and the inflation bubble was very likely to end, even if the economy tended to continue to do badly. Smart money sold near the peaks. The sheep were sheared once again.


view=detailV2&ccid=5VoXyuX%2F&id=7D16BA1AFF687D5C6F5D00E23B3371CAF5FEC031&thid=OIP.5VoXyuX_PAiSoKmNYzB3XAHaFl&mediaurl=https%3A%2F%2Fsdbullion.com%2Fmedia%2Fwysiwyg%2Fgold-pricell short.

[empedocles]

2. Note: I do not endorse 'stockdisciplines' or any other firm.

I just used some of the 'sheep an sheep shearers' text to illustrate the concept, that the markets do not necessarily react directly to 'the news'. I am not recommending anyone here, to buy or sell gold.

[Johnny2X2X]

3. But they should react to valuations

Stocks are trading at 130% of what they should be worth historically in terms of fair market value based on earnings. That's not normal for that to be maintained.

[SoonerPride]

4. This

The market outlook for earnings for MOST companies is in the tank, save a few companies whose products and services have been in increased demand.

The market is due for a serious downward correction to catch up to the reality of earnings in Q2, 3 and 4.

36,000,000 unemployed people don't have excess money to burn on dining, entertainment, travel, etc.

[ProfessorGAC]

6. 130% Is Too High

There are many major players with fair value now that the needed 20% correction occurred.
The markets didn't fall just because of COVID. It was definitely a trigger that precipitated an overdue correction.
Profitability changes, especially adding in tax cuts, suggest equilibrium for the Dow is around 23k.
It was 18.3k on election day 2016. At that point, the upward drift of D/E ratios was just starting to become statistically significant.
They've gone up 9% relative in just 3.5 years, even though equity value was inflated.
25-30% increases over 3.5 years (around 8%/yr) is about right.
The ongoing issue is spendable income while UE is so high. As consumption falls, revenue falls, and operating overhead plus S,G&A stay static. Profitability is negatively affected.
That will cause a market decline that actually correlates to economic performance. This will happen when the markets are at, or near, equilibrium.
Happened in 2006-2010.
The DJIA should never have been at >29k.
Last note if you know any PINO apologists: last 5 years of Obama, the Dow, S&P, and Russell went up 12% annually. Under 3+ years of "it" it's gone up 8%. Who's better for the economy again?

[Johnny2X2X]

7. We were due for a big change

P/E ratios are a decent way to determine fair market value in general. Not good for individual stocks IMO, but over time have been pretty predictive for the overall market.

https://www.yardeni.com/pub/stockmktperatio.pdf

Forward P/E of 20+ as about 130% of historical averages. Basically, we should be at 16K right now. But the way markets can work, you may see us plunge right through 16K, all the way down to 10K, that's about what it would take to be as out of wack the other way as we are right now.

And what I remind people in every discussion this year is that last year, 3/4 economists predicted a recession by 2021. That's an overwhelming majority. We were going to see a down turn without Covid-19.

https://www.washingtonpost.com/business/2019/08/19/out-economists-predict-us-recession-by-survey-finds/

[ProfessorGAC]

8. I Agree With The Ending

Recession was coming. There are obvious monetary reasons for it so that seems a certainty, with or without the epidemic.
I don't concur about the PE inflation.
That's OK. We don't have to agree on every detail!

[Johnny2X2X]

9. Thanks

Yeah, we don't have to agree on every detail. What a refreshing thing to say.

[uponit7771]

5. I've been telling people for 5 weeks that Trump has been lying about 3rd quarter and the indexes

... didn't listen to the warnings everyone was talking about at all.

Trump is a nut case, they still believe he's sane.

Its a failure of the 4th estate to present Trump as a sane mamal.