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How Low is Low Enough?

August 24, 2011 – 4:55 pm

The weekly unemployment claims report is a leading economic indicator and the four week average of that number is falling. This week’s number should give us a further hint of the direction. All other reports, while important, look backwards.

The stock market is always looking forward so when statistics are released that look backward and the market ignores them then you might see a market ready to rally. Fear is so high that it won’t take much to turn the fear around, but there has to be some evidence in the economy to convince investors and traders.

The P/E ratios of stocks are at very low levels, pre-recession lows, and near numbers that haven’t been seen in generations. Earnings are still rising and with stock prices falling dividend yields have risen higher than treasury yields. That too has not happened in generations. The question is not will the stock market rally it is from what level. The possibility of a recession is rising as fear could push us into it, but at some point soon stock prices are so cheap that buyers will start to buy just for the dividends alone and that will stabilize stock prices. If there is no recession, and odds are there won’t be, though those odds are not as high as they were a few weeks ago, the market is going to take off.

Good Trading
Steve Peasley

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