Is A Pullback Imminent?
This is how a trader must approach the market, each and every day. Have a look, and then I’ll make a few observations.
Link: Is A Pullback Imminent?.
And so the rally continues. While I think a correction or at least a pullback is imminent, I spent some time today putting on a couple of trades in my portfolio just in case I’m wrong. Given the bullish calls…
First, notice the assumption that big earnings increases are needed to "justify" an increase in earnings multiples. The multiple is the "fudge factor" used by pundits and traders alike to explain (after the fact) why the market did not react as news would suggest. A pundit may say, for example, that a stock deserves "multiple compression" since its good run cannot last. This means that even though the fundamentals have continued to improve, the stock does not go up. I’ll discuss multiples in greater detail, but for now, let’s just take note that we have had over two years of great earnings increases of the sort Charles is looking for, but PE Multiples have decreased.
Second, there is an ongoing debate about what market multiple should be expected when the ten-year note is trading at 4%. Unless one believes that the economy is going in the tank, stocks are offering a much better return. Taking this view, it is not surprising that there is asset allocation from bonds to stocks. I am suprised that we have not already seen more of it. A major firm last week went to a recommended 100% allocation to stocks, as opposed to the traditional mix of 50-60% stocks, some bonds, etc.
None of this means that Charles is wrong in his prediction. Markets do not march straight up without pause. But there are different ways to look at the evidence, and tempting to see it as supporting your own position.
Now you see why I call the "multiple" a Fudge Factor! Anyone can offer an opinion on what it should be. Better to use some data…..