S&P 500 v. Earnings

First, please read the Disclaimer.

Corporate profits are plunging as a percentage of GDP, while stocks are still headed in the other direction. The last time this happened was ahead of the Dotcom crash when companies with names like Pets.com, eToys.com, Flooz.com and theGlobe.com — and billion dollar market caps but no cash flow — were erased from the boards.

Wilshire 5000/GDP & Corporate Profits Before Tax/GDP

Jim Bianco shows that S&P 500 is currently trading at a similar forward PE ratio of 25.88 compared to the Dotcom bubble peak of 26.98.

The S&P 500 itself is inching higher, reflecting the tug-of-war between technology stocks and the broader market, but declining Money Flow peaks warn of secondary selling pressure. Expect another test of support at 3000. Breach of support is still unlikely but would signal a correction.

S&P 500

Bearish divergence on the Nasdaq 100 is more severe, flagging strong selling pressure. Expect another test of support between 9500 and 10000. Again breach of support is still unlikely but would warn of a strong reversal.

Nasdaq 100


Stocks are over-priced and earnings are under pressure. We expect the market to re-price as the long-term outlook grows clearer and prospects of a V-shaped recovery fade.

"The public ought always to keep in mind the elementals of stock trading. When a stock is going up no elaborate explanation is needed as to why it is going up. It takes continuous buying to make a stock keep going up. As long as it does so, with only small and natural reactions from time to time, it is a pretty safe proposition to trail with it.

But if after a long steady rise a stock turns and gradually begins to go down, with only occasionally small rallies, it is obvious that the line of least resistance has changed from upward to downward. Such being the case why should anyone ask for explanations? There are probably very good reasons why it should go down...."

~ Jesse Livermore


Colin Twiggs is director of The Patient Investor Pty Ltd, an Authorised Representative (no. 1256439) of MoneySherpa Pty Limited which holds Australian Financial Services Licence No. 451289.

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