When assessing the direction and health of the stock markets, its important to analyze several variables and not just one or two. Currently, the S&P 500 stock index is approximately 27 times earnings. When looking at the long-term average (dating back over 100 years), the average P/E mulitple was 15 times earnings. Should the market trade to this level, the S&P 500 would be valued at approximately 600 points….OUCH ! I don’t believe we will see this level, but I wouldn’t be suprised to see 850.
Most of the “technical indicators” point to lower markets: the S&P 500 has cleanly broken its upward sloping trendline, since March 2009. Price oscillators, such as the MACD, have broken down, indicating that stocks are headed lower.
The Global debt problem is getting worse, with countries such as Greece, Portugal, Spain, Italy and the UK with very high sovereign debt. As a result, interest rates are on the rise. 10 year interest rates have risen by almost 4% in the last few weeks on Greek bonds. This has put very serious downward pressure on the Euro and thus, upward pressure on the US $.
A rising US$ is putting downward pressure on commodity prices with copper down 18%, aluminum down 14%, lead down 14% and oil down over 7.5% in the last week. Commodity inventories are very high and mostly likely will add to the pressure for lower prices in the coming weeks.
Higher interest rates are inevitable in the US and then in Canada. It won’t be from the usual inflationary pressures, but rather from the increase debt risk.
Stocks have had a good run from the March 2009 lows. Its time to protect profit and await the great opportunities that are coming.
Regards
Mike
Tags: bonds, commodities, Euro, Global markets, Stocks, US$
