It's easy to say bearish things about the market. It's easy to say bullish things, too.
June 5, 2003: 8:43 AM EDT
By Justin Lahart, CNN/Money Senior Writer
NEW YORK (CNN/Money) - With the Dow over the 9,000 mark, it's not hard to find all sorts of reasons to sell stocks. It's not hard to find all sorts of reasons to buy.
It's the sort of situation that suggests whatever happens, it's going to be big.
Let's start with the reasons to sell. The first one is easy: By just about any measure you can think of, stocks aren't cheap. Based on GAAP earnings, the S&P 500 now has a price-to-earnings ratio of 32.42. When the bull market began in 1982, that P/E was about 7.6. The P/E on a pro forma basis -- looking at earnings before "extraordinary" charges like firing costs and plant closings -- is also high at 20. And yes, interest rates are low, so maybe stocks can carry higher valuations -- but if companies earn anything their valuations suggest they're going to, you can bet that interest rates are going to be heading on up.
Then there's the shorter-term issue of how incredibly bullish the market has got. The Chicago Board Options Exchange's Volatility Index -- a closely-watched indicator better known simply as the Vix -- has lately hit its lowest levels in a year, suggesting that there is very little fear in the market. Other sentiment indicators also show a high degree of bullish complacency in the market.
But the potential for stocks to continue rallying, and to do so in a very big way, is also there.
First, money is gushing into the economy. Rates are low and Fed has signaled that it won't raise them for some time; in fact, it looks like it will cut again at the end of the month. This has brought down long-term rates to the lowest levels since the 1950s and spurred the biggest wave of mortgage refinancings yet. Washington has passed a big tax cut, and rebate checks are going to be hitting mailboxes in the coming months.
All that money has to go someplace, and one of the places it can go is financial assets.
Second, all the major indexes have recently taken out major resistance, moving past levels where they had fallen in the past. For many investors, this could be a sign that the worst is over. A fresh influx of mutual fund cash could be scudding from low-yielding money market accounts into stocks.
Finally, there is a raft of professional doubters in the market that are getting squeezed badly. Hedge funds that have gone short. Mutual fund managers that have played cautiously and are now being left in the dust. If these folks throw in the towel -- either by covering their short sales or trying to play catch up -- fresh fuel would be added to the rally.
So which will it be, up or down? The answer may come in how the market reacts not to good news, but bad. Some may soon be at hand -- the May jobs report is due out Friday, and it will likely offer a painful reminder of how bad the employment situation in this country is. If stocks can fight their way past that, the market could easily rally into the summer. If not, things could get rough.
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