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These key valuation parameters (summarized below), are a result of arithmetically averaging the parameters from all stocks in each index. The data utilized to prepare the summary below were from Yahoo Finance. If you e-mail me, I will be glad to forward the spreadsheets containing all of the data and stocks that were used to assemble this summary.
Both the S&P mid-cap and NYSE composite indices trade at a high valuation. By averaging all stock components in each index with actual earnings result in trailing P/E’s of 41 for the mid-cap index and 34 for the NYSE composite. These are somewhat “rich” by most conventional standards of valuation. However these rich valuations include stocks in each index with actual earnings averaged, including those with triple-digit P/E’s. (Those stocks with negative earnings were not included in either average.) If the stocks in each index with triple digit P/E’s are also removed from the averages, the trailing P/E’s drop considerably to a more reasonable 24 and 21, respectively. Although not as “rich” as when stocks with triple-digit P/E’s are included, these valuations are also not particularly cheap. It’s when the forward P/E’s are examined that these indices appear to be more reasonable. The forward P/E’s (based on Wall Street analyst predictions), are 17 and 15, respectively. However, note that these forward valuations correspond to Wall Street-predicted earnings growth rates of a whopping 29 percent for each index. (The projected earnings growth is even greater when stocks with triple-digit trailing P/E’s are included in the averages.) Considering that corporate earnings are already at their historical highs, 29% year-over-year growth rates seem somewhat optimistic. Dividends are measly in these indices compared to those also small dividends in the Dow and S&P 500. Current dividends average 1.26% for the S&P mid-cap 400 and 1.75% for the NYSE composite. Wall Street analysts are predicting that 88.5% of the S&P mid caps will have earnings growth in the next 12 months. Similarly, analysts see 81.5% of the companies comprising the NYSE composite to post higher earnings next year versus this. Again, this seems somewhat optimistic to say the least. As with the Nasdaq 100, Wall Street’s predictions discount nothing but blue skies and sunshine into the foreseeable future. Today’s Market The market rallied strongly with all major indices up significantly led by many of the momentum favorites. The market liked whatever Mr. Bernanke said. Several indices were up over 3% including the Dow Transportation index. It is notable that short interest was climbing over the last few weeks and therefore making a favorable environment for a short squeeze. It is also relevant that today’s action probably qualifies as an Investors Business Daily “follow-through” day. Check for yourself. When enough folks follow a technical method, the method often becomes the market, and that is why the short term prognosis is now bullish for the major market indices. If this prognosis becomes fact, then it will provide another shot of adrenalin to the US consumer for digging his financial hole still deeper. If this rally stalls after a few days, one would have to consider the reasons for today’s bullish market action:
This is not the stuff of strong hands, but I suppose a profit is a profit; especially when you take it. For the contrarians, gold, oil and their corresponding shares were also up today. The HUI was up almost 8%. And still all assets that trade on any stock exchange seem to be tracking each other on a daily basis. It is doubtful that such tracking of assets with contradicting fundamentals can be sustainable into the long term. Have a great evening. Martin Goldberg
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