{"id":13717,"date":"2010-10-06T16:13:49","date_gmt":"2010-10-06T20:13:49","guid":{"rendered":"http:\/\/countingpips.com\/fx\/?p=13717"},"modified":"2010-10-06T16:13:49","modified_gmt":"2010-10-06T20:13:49","slug":"stock-prices-are-still-cheap","status":"publish","type":"post","link":"https:\/\/www.investmacro.com\/fx\/2010\/10\/06\/stock-prices-are-still-cheap\/","title":{"rendered":"Stock Prices Are Still Cheap!"},"content":{"rendered":"

Stock Prices Are Still Cheap!<\/a><\/span><\/p>\n

By Jared Levy, Editor, Smart Investing Daily <\/span><\/strong><\/p>\n

Are stock prices still cheap? It all depends on how you look at it of course and what your time horizon is for the stock’s price history.<\/p>\n

Part of what makes the markets function properly is the multitude of belief systems, strategies, analysis and risk tolerance that we all use.<\/p>\n

For the most part, just about every one of us has a slightly different opinion on an investment. Even if two or more of us are bullish, chances are we would pay different prices for that same stock. Hopefully, if the position became profitable, it is also likely that different investors would choose different stock price spots to sell at.<\/p>\n

Of course for every buyer there has to be a seller, but as bullish sentiment increases, buyers may be willing to pay more as sellers move their prices up. On the flip side, if bearish sentiment is in control sellers bring the downward pressure and buyers drop their stock prices accordingly. You can trade these “variations” and short\u2013term stock price movements as I do often, but if you are an investor, you need a different measurement for the price of a stock<\/a>.<\/p>\n

More importantly, if I want find where the market is headed longer term, I’m not so concerned with the small transactions that are taking place every second. I want to know where the BIG trends are going to come from…<\/p>\n

Will the buyers begin to dominate and push the sellers away or will the bears take control?<\/p>\n

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Stepping Back to See the Relative Value of the Stock Market<\/h3>\n

Sometimes it’s good to take a step back and look at the big macro picture to get an idea of relative value<\/a>. To find out if the stock market is relatively over or underpriced, you need to examine a couple points:<\/p>\n

1. Economy \u2013 <\/strong>Even though it’s not all crimson and clover out there, <\/strong>the economy is SLOWLY improving according to many data sets.<\/p>\n

Second \u2013 quarter U.S. GDP grew 1.7% (better than the previous 1.6% estimate). That is not to say that this country doesn’t have struggles ahead, but it seems that we are slowly on the way to recovery.<\/p>\n

I do find it a bit amusing that the NBER issued a statement that the recession ended June 2009, then went on to say, “Any future downturn of the economy would be a new recession and not a continuation of the recession that began in December 2007.” You have to just adore economists… I’m just hoping the unemployment rate drops, so more Americans can start experiencing the “end of the recession.”<\/p>\n

Regardless, the stock market has moved higher (leading as it usually does) out of the recession, looking forward in time.<\/p>\n

2. Valuation \u2013 <\/strong>There are many ways to gauge the “value” of the stock market. Sara outlined some great tactics here<\/a>. The most simple and common method is to examine the market’s total P\/E (price\/earnings) ratio.<\/p>\n

I like to look at the S&P 500 (SPX), because it gives a much broader and diverse picture of 500 of the U.S.’s top companies compared to only 30 in the Dow Jones. Also note that many Nasdaq and Dow stocks are also contained in the S&P 500.<\/p>\n

There are two views we need to take on P\/E ratio:<\/strong><\/p>\n