Friday, April 02, 2010

Piling on mediocre returns

An interestingly juxtaposed two articles on Bloomberg, contrasting fundamental and technical analysis:

Don’t Expect Much From U.S. Stocks in Next Decade: Chart of Day
This quarter’s gains in U.S. stocks have made them so costly relative to earnings that returns for the next 10 years may be minimal, according to Dylan Grice, a strategist at Societe Generale.

The CHART OF THE DAY displays a price-earnings ratio for the Standard & Poor’s 500 Index that’s based on average profits for the past decade, as compiled by Yale University Professor Robert Shiller. Grice used the data to reach his conclusion, outlined in a report today.

Shiller’s cyclically adjusted ratio stood at more than 20 times earnings this quarter as the S&P 500 headed for a fourth straight quarterly gain, the longest winning streak since 2007. The index rose 5.2 percent through yesterday.

“The risk is there -- as it always is -- but the returns aren’t,” Grice wrote.

S&P 500 to Rise 13% on ‘Confirmed Breakout’: Technical Analysis
The Standard & Poor’s 500 Index, heading for its biggest first-quarter gain since 1998, will probably rise 13 percent in the next few months after staging a “confirmed breakout,” says Katie Stockton of MKM Partners.

The benchmark measure of U.S. equities closed above its January high of 1,150.23 for two consecutive weeks on higher- than-average trading volume, after failing to stay above that level in the previous week. That breakout confirms the S&P 500 has entered a new phase of its yearlong rally

Stockton based her new projection on what’s called the measured move technique, which says a security’s future advance tends to be equal in length to the rally that precedes it. She sees even more gains in the longer term: Using the S&P 500’s advance from its July low to its January high as the reference, Stockton said the index may gain the same amount, or about 270 points, from its February low of 1,056.74, in the next five to six months.

Stockton said she expects the market to retreat in the short term, because investors are too bullish. The ratio of puts to calls on U.S. equities dropped to 0.40 on an intraday basis on March 25, the lowest level since Jan. 11.

“Sentiment is still somewhat complacent and is supportive for a pullback,” Stockton said. “The confirmed breakout suggests the pullback will be more modest than I had originally expected.”

What's a poor Guambat to do but remain poor.

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