Did the stock market actually lose value, or did an unsustainable

[hedgehog]

bubble burst? Are stocks as of today actually undervalued or are the at their "correct" value? Were any of the gains since 1997 real or was it just people churning the market?

[kurt_cagle]

1. The Long Term Moving Average prior to the Greenspan "boost"

would have placed the DJIA (what's commonly referred to as the DOW) at 7540 today. The market will likely have one more major swing south - I'm guessing it will test 5000 at one point, before settling back in at around 7200 around the end of the year, all other things being equal

Of course this assumes a linear growth trend, and there are some strong headwinds that the market is facing right now. Oil can spike (put things into perspective, oil is already 50% more expensive than it was at its lowest point only four months ago) and likely will. The stimulus package could inject a huge amount of liquidity directly into businesses, which could boost things, and inflation could re-emerge, and if it does, it will almost certainly be nasty (8%+ per annum). In percentage terms, I think that the market could easily fall another 20%, given the volatility of the market, before bottoming out. The question is how quickly people are willing to get back into the market.

[hedgehog]

2. So if I understand what you're saying, all things being equal,

7540 is where we would expect the market to be today if it followed historic trends tied to physical growth in the economy. By "physical growth", I mean actual manufactured objects and services such as food prep, transportation, etc as opposed to exotic new financial products.

In other words, there was a lot of money sloshing around the system that didn't represent anything tangible.

[readmoreoften]

3. Or are they still overvalued?

:shrug:

[On the Road]

4. I Don't Understand the Mutually Exclusive Choices

Yes the market lost value, and yes it was proably an unsustainable bubble. There is no external value to the market -- it is only a collection of the "opinions" of investors.

Opinions differ on whether the market is undervalued. Only time will tell. However, here are a couple of knowledgable opinions:

1) Alan Newman, Cross Currents: Newman is a perma-bear and a bit hysterical, but his long-term historical analysis is interesting. His site does not allow copying text, but he estimates it will take 13 years for the Dow to reach its previous peak.

http://www.cross-currents.net/charts.htm

2) Carl Swedlin, Decisionpoint: Swedlin is very impartial and level-headed. He is one of my favorite analysts. Although he is mostly a technician and goes with market direction, he has posted for years that the market is overlvalued. Although the current Price-Earning of the S&P is about 15 (which historically is a fair value), Swedlin says it does not include large extraordinary items. With those included, here are his projections of fair value:



http://www.decisionpoint.com/ChartSpotliteFiles/090213_earn.html

And here is a letter asking him about valuation:

Hi Carl,

I really enjoy your service and have for about nine years. Thank you for all your hard work and dedication. I was wondering if you could tell me the potential technical "bottom" numbers for the Dow, S&P 500, and Nasdaq?

Thank you very much.


ANSWER: I don't follow the Nasdaq. I have rough targets of Dow 3000 and SPX 300 around late-2010. I wouldn't exactly call these "technical" targets -- I am guestimating a total decline of about 80%, using the 1929-1932 bear market 90% decline as a guide. The timing is based on the estimate for the next 4-Year Cycle low, which is due mid-to-late 2010.

While I can't swear by these estimates, I don't think I'm sticking my neck out too far.

Carl

http://www.decisionpoint.com/ChartSpotliteFiles/090227_lows.html