SPX 09-10-28

Here's my first post. All my trading friends have decided to create their own blog so I might as well create my own.


Here's my current market outlook for the S&P500. I think that the market made a major top and is starting the longer term downtrend. However, I still want 1020 to break in order to confirm change in trend. I already entered 33% short in my trading account and went in 100% short in my IRA account. I will push the remaining money into shorts as we hit a 38.2% fib retracement upwards after breaking 1020.

Here's also another interesting tidbit from the fundamental perspective. S&P500 had its P/E ratio hover around 20-25 historically as seen from this link:
www2.standardandpoors.com/spf/xls/index/sp500pe_ratio.xls

The P/E ratio shot up during the tech boom (46) which quickly deflated back tot he norm after the tech bubble was burst. The last data entry was of Dec 2008 and the S&P had a P/E ratio of 60 then.

I looked at the current S&P500 P/E ratio as shown from the link below:
http://www2.standardandpoors.com/portal/site/sp/en/us/page.topic/indices_500/2,3,2,2,0,0,0,0,0,1,11,0,0,0,0,0.html

S&P 500 Statistics As of September 30, 2009
Total Market Value ($ Billion)		9,337
Mean Market Value ($ Million)		18,673
Median Market Value ($ Million)		7,978
Weighted Ave. Market Value ($ Million)		74,455
Largest Cos. Market Value ($ Million)		329,725
Smallest Cos. Market Value ($ Million)		814
Median Share Price ($)		32.850
P/E Ratio*		140.76
Indicated Dividend Yield (%)		2.05

*Based on As Reported Earnings.

As you can see, the P/E ratio as of Sept 2009 is a WHOOPING 140!!! 140!!!!

So for shits and giggles, let's calculate the "as reported earnings" of the S&P500 companies:

E = P / (P/E) = 1042 / 140 = 7.44

The P/E ratio is enormously high which I think is unsustainable. Let's just say that we go back down to the end of 2008 P/E ratio which is 60. Let's solve for what the S&P price should be right now then:

P = (P/E) * E = 60 * 7.44 = 446.

This tells us that the S&P500 should be at 446 right now. However, this is assuming that the companies will earn the same amount of profit. This shouldn't be the case because I would assume that the companies would continue to grow earnings but at a very slow rate of increase if any. So the E would slightly go up. Also, the P/E ratio will be lower than 60. I was just giving it some room. Anyway, these 2 effects would cancel each other and still give the S&P a low price.

In short, I think that the S&P500 is currently overvalued and I expect lower prices ahead. Much lower.