Weekly Risk Report 10/06/2008
This is the final act in a play called "It seemed like a good idea at the time." Stars in the play are current and former members of the legislature along with stand up comic and sax player Billy C. While the storyline could be considered a tragedy by some it could also be considered a comedy by others. To say that EVERYONE has been moved by this play is not an overstatement.
The most immediate response in our data base for market risk shows up in Relative Valuation which dropped to an even better value this week. Value Line's P/E ratio for their Standard 1700 stocks dropped to 14.4, the lowest level since the week of March 10th, 2003 - the bottom of that bear market. Relative Valuation that week was 15.4 while today it is 15.52. From that low point we saw the Nasdaq Composite Index rise 119%, the S&P500 up 92% and the Dow rose 84% through last year's peak.
Our Divergence component also reacts quickly and shows the lowest level in several years. It says that essentially everyone who has witnessed the "play" has voted to sell the market at any price. Usually when we've seen this sort of low value, the market is nicely higher at the 3 month and 6 month points in the future. There continues to be some speculation, but moderate by historical measures. This is bound to drop further as Value Line's data catches up to real time.
So, how does the market seem compared to the 2002-'03 bear market bottom? By our usual measures it seems to be highly oversold and one of the best values seen in 5 1/2 years. We continue to prudently deploy our Cash Reserves as the markets have been descending. This downward averaging can be compared to tilling and planting seed. If the seed's vital force is still there, we'll see green sprouts sometime in the future. We'll be ready to harvest profits when they mature, as well.
