Short-Lived Correction?

By November 19, 2010Weekly Writeup

As recently as last Friday, markets rested on the precipice of a trend change. Most of our indicators were straddling 50-day trendlines.

The ticker now suggests that the corrective activity may have been short-lived. The S&P 500 remains well above a short-term, 50-day MA. Meanwhile, Vanguard Emerging Markets (VWO) bounced definitively higher off of its support.

SPX 50

VWO 50

Similarly, the CBOE Volatility Index (VIX) briefly broke above its trendline, then turned lower. And, not only did markets pursue a course of relative calm, but the U.S. dollar also appears willing to stay “range-bound.”

VIX 50

USD 50

Although we typically use technical analysis to illustrate market direction, let’s incorporate a fundamental valuation perspective. The S&P 500 was at 1200 in April of 2010. It is at 1200 here in November of 2010. That means the price (P) of the S&P 500 is the same as it was 7 months ago, even though companies are earning (E) quite a bit more money than they were 7 months ago. Better still, companies are continuing to increase their earnings power going forward.

With the P staying the same, and the E rising, P/E ratios are getting smaller. It follows that… in a traditional sense… stock assets are becoming inexpensive. Historically speaking, they may even be “cheap.”

There will always be a laundry list of items that plague the “markets.” And you should never be surprised to see near-term setbacks. Yet the high probability is that stocks should continue to find a way to grind higher.

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