Fundamental Analysis-Market "Means"

Investments swing from over valuations to under valuations, back and forth continually. What we want to do is find the mean and trade it. One of the best ways is the P/E ratios. P/E stands for price to earnings. If a company has 1 million shares and earns 1 million dollars, that is a p/e of 1. So if the stock were trading for 10 dollars, we have a p/e ratio of 10.

If you are still awake keep following here. Over 70 plus years of countless costs and time and energy spent, many "smart" analysts have concluded that the average p/e is about 18 or so (there are many arguments as to precisely what that number is). So when you get a p/e of 20 for example, you are paying too much and we would expect a drop to the mean of 18, but in order to have a mean we know the p/e will shoot past the 18 into 16 or so. That is how you get your mean.

Now we just came off a 48 S&P average p/e.....Repeat this 48!!

If the average is 18, does this give you an idea of where the low would be expected?

Now is what happens is stocks drop, then earnings drop which makes stock p/e's pricey once again so stocks drop etc.

Myself? I am looking for 8 p/e or so before I expect the next bull market. At that time, you can buy and hold again for the next decade and have fun. Until then, we still have much more pain here folks. Last I checked we are at 20.

That is just the way it is. Bubbles go to far and corrections go to far.

As an investor, I personally cannot wait on the sidelines for another 5-10 years for the next bull to gain traction. I want to capitalize on this. So I trade from the short side. Some day there will be a time to go long.

What we are witnessing now is stocks being priced a bit high only to have the earnings season show less than analysts expected, forcing prices down until the next earnings round. This feeds on itself until most everyone gives up and the mantra changes to stocks are a suckers game etc. that is where you would expect 8 p/e's and you would expect to get on board to a new bull market.