Friday, June 09, 2006

Bottom in place

I have been looking at this market will a bullish bias because I believe stocks are cheap compared to the alternatives. The S&P is expected to earn 95.54 in 2007 according to the bottom-up analyst consensus. This gives the index a yield of 7.7% (95.54/1246) which is almost 3% greater then the 10-yr treasury. Credit spreads and a flat yield curve indicate relatively little risk right now, so for the market to have a 3% risk premium over bonds is just ridiculous. In addition there are more companies beating analyst estimates then not, so the 3% difference may turn out to be understated. In the short term I believe we put in a bottom yesterday because the indices have fallen more then 2 std deviations from their 20 day MA which is normally an aberration and for the hour ending 11:30am we hit a new multi-month low but closed at the highs of that period on a volume spike. Which could very well indicate a bottom in place.

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