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Debate Rages: Sucker's Rally or Time to Buy?
Posted Oct 13, 2008 10:39am EDT by Aaron Task in Investing, Recession, BankingWith the S&P trading at 13 times expected 2009 earnings and 17.2 times on a trailing P/E basis, "buy the dip" is the mantra from many observers:
- "The sell-off has gone much too far and stocks are poised to rally powerfully if the downturn is less severe than investors," according to The New York Times.
- The "Ben Graham P/E" - which divides the price of stocks by their inflation-adjusted net earnings average for the past 10 years - is the lowest its been since 1989, The WSJ reports.
- Even typically skeptical observers like Barron's Alan Abelson and FusionIQ's Barry Ritholtz were writing this weekend about the potential for a short-term market bounce of between 20%-30%.
That message, along with news of the U.K.'s injection of capital into big banks and Mitsubishi UFJ's investment in Morgan Stanley, helped the U.S. stock market rally strongly early Monday, following the path of global proxies.
I would caution against reading too much into Monday's action: the bond market and U.S. banks are closed in observance of Columbus Day while Japan's financial markets were also closed for holiday observance.
More importantly, I'm highly skeptical Friday marked anything more than a temporary bottom for stocks, for a variety of reasons:
- The continued lack of a coordinated global policy response, and the U.S. continuing to lag other nations in taking the most dramatic steps like insuring all bank deposits and directly injecting capital into banks.
- Accelerating weakness in the "real" economy; ISI's Ed Hyman dramatically reduced his GDP estimates through the second half of 2009 and predicts unemployment will hit 8.5% before the cycle turns.
- Valuations tend to overshoot on the downside and bear markets historically don't end until P/E ratios hit single digits.
- Even after devastating declines in recent weeks, "buy the dip" remains the conventional wisdom, meaning sentiment still remains overly optimistic.
"The past week has demonstrated that trying to buy 'close' to the bottom of a bear market can be a very dangerous strategy," Lowry's Reports commented this weekend. Last week's "series of 90% down days" - trading sessions where 90% or more of both price action and volume is to the downside - "is, at this point, solid evidence that the desire to sell has not been exhausted."
Veteran market watchers like Art Cashin of UBS and John Roque of Natixis Bleichroeder are using the 2002 lows - about Dow 7300 and S&P 775 - as downside targets. Yes, long-term investors should continue to fund their regular retirement accounts, as Henry and I discuss in the accompanying video.
But short-term traders - and those near or at retirement age - would be wise to keep those targets in mind.
264 Comments
- Monday October 13, 2008 10:47AM EDT
I don't think we've hit the true bottom - however for the value investor, it's a WONDERFUL time to buy. This is a once in a lifetime opportunity - if you are living with minimal debt and investing aggressively you'll win. Mike in Oklahoma.
- Monday October 13, 2008 10:59AM EDT
Another Wall Street "make a quick buck" scheme They won't be happy until they suck ALL the money out of the country. Riches gained on the backs of the working class citizen. I can tell you this rally is the FED buying up stocks. It's a phony rally, and a scam, in my opinion.
Yahoo! Finance User - Monday October 13, 2008 11:02AM EDT
agree with first comment. the more we hear about "reaching the bottom" the more certain we can be that it's not here. bottoms don't happen when everyone agrees they've arrived. bear markets don't end on good news, they end on bad news. buying now is terrific way to get burned.
- Monday October 13, 2008 11:06AM EDT
Aaron needs to go...please stop your negative headlines...people like you fuel the problem. Just leave you and Cramer!
Yahoo! Finance User - Monday October 13, 2008 11:10AM EDT
The modern form of depression is stagflation. The current situation would normally lead to depression, but you flood the markets with money and instead get the same real negative return through stagflation. In both situations, a real panic, or stagflation GOLD wins. We are nowhere near a bottem, in 73-74 FTSE fell 68%.. we're not even down 50%.
Yahoo! Finance User - Monday October 13, 2008 11:11AM EDT
Based on the Law of Gradualness, I you would expect a bounce. Perhaps to 9300. But that's it. I expect the Dow to loiter around 8000, and eventually to drop a lot more. The reason being that Americas fundamentals a so terrible - all that debt. The other thing to consider is that trading books point out that General Motors (GE) is a leading indicator of the Dow . Have a look at GE on bigcharts.com . Its terrible. Its gone from about $40 to $20 in one year. Its telling you where the Dow will go. There's even talk of GE going under. The USS Dow-Titanic has hit an iceberg and is about to go under. Keep your money in the bank folks.
- Monday October 13, 2008 11:11AM EDT
If you like a stock a lot, take 10% off it's 52 week low and put a buy at that price, or just wait for the next low on the indexes.
- Monday October 13, 2008 11:12AM EDT
If you like a stock a lot, take 10% off it's 52 week low and put a buy at that price, or just wait for the next low on the indexes.
- Monday October 13, 2008 11:12AM EDT
As Hank "Stutters" Paulson would say, "s-s-s-s-suckers rally!" You're a fool if you go long for the long. Have a daily exit strategy. The ONLY reason one is seeing an up day is the technical traders wave 4 of 3 up. People think, we still have every problem we had at the beginning of last week. A fool and their money are soon parted!
- Monday October 13, 2008 11:13AM EDT
As Hank "Stutters" Paulson would say, "s-s-s-s-suckers rally!" You're a fool if you go long for the long. Have a daily exit strategy. The ONLY reason one is seeing an up day is the technical traders wave 4 of 3 up. People think, we still have every problem we had at the beginning of last week. A fool and their money are soon parted!
Yahoo! Finance User - Monday October 13, 2008 11:14AM EDT
Aaron, S&P is trading at 9.2 times the p/e for 2009 earnings so the market is even cheaper than described above. If Bear Markets typically bottom with single digit P/Es, this sure sounds like a bottom. Government's around the world are getting more aggressive with their responses to the ongoing crisis. Is this the exact bottom? We'll only know in hindsight, but if you're a long term investor, you don't need to get the bottom at it's lowest. The S&P will go above 9.2 times the P/E so seriously, yes, I think it is time to start wading in the water.
- Monday October 13, 2008 11:14AM EDT
Just remember that it took 25yrs for the niffty fifty to come back, so if you you have that time buy! If not, look out below. Oh did someone mention earnnigs? Maybe we don't need any and just let the government send us checks.
- Monday October 13, 2008 11:15AM EDT
It's been said "People who pick bottoms get smelly fingers" . This market needs to show me more than just a good 'DAY' trade
- Monday October 13, 2008 11:16AM EDT
People are CRAZY to buy here. Anyone who has been reading knows there is a very real possibility we have only seen the TIP of the iceberg. So they agree that short term things are very scary. But they somehow are able to see far into the future and 'know' that if your time horizon is over 5 years things will be great. Shoot. No one knows what is going to happen next week... let alone 5 YEARS from now!
- Monday October 13, 2008 11:19AM EDT
Temporary Rally - Stocks were wildly inflated. They will still be inflated when the earnings are adjusted to reflect the new bear market reality so they are still going lower. This is a bear like 1942. In 1929, the GDP to Leverage (debt) ratio in the U.S. was 250%. Before recent weeks in 2008, it was 350%. It's air, it's borrowed money. Record debt, record high P/E ratios - stands to reason doesn't it? Irrational Exuberance -that giddy high from using the Amex Black Card that daddy gave you... oops.... daddy's broke!
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Yahoo! Finance User - Monday October 13, 2008 10:45AM EDT
Big time sucker's rally...last time I checked nothing got fixed with economy.