Chart Ideas

[rimshot]

Barry Ritholtz's August 15, 2011, blog post on the topic of possible selling climax during
the August price and NYSE breadth decline - http://t.co/21DmbYZ
(Barry is not the author of this specific blog post)

excerpt -

Let’s return our gaze to the present day. Was the low achieved on August 9th at exactly 2:44 pm, when the S&P 500 Index traded within pennies of 1,100? So far, that intraday low is the bottom. As we know, the subsequent rally has carried the market higher, notwithstanding very high volatility.

If we look at the entire period of the selloff from the peak on April 29th to the intraday trough on August 9th, we find the high for the S&P 500 Index is 1,360 and the intraday low is 1,100. Does this mark the completion of a fast, 20%, bear-market correction? Did the climax on Tuesday mark the final bottom of this drastically unsettling period?

The answers to these questions will not be known for months. There is a very good chance that we have seen the bottom of the selling climax. Alternatively, we may retest it. There is a chance that another substantial down leg lies ahead. The debate among investors is fierce.

2nd excerpt -

Our conclusion, “simply put,” is that stocks are now very inexpensive. When an equity risk premium is estimated at 6% to 7%, it is in the very remote outlier section of history. It says that you are being paid handsomely and in an extraordinary amount to own shares of fine American companies.

History would suggest that every time you had the opportunity to enter the stock market with an equity risk premium this high, you succeeded. There is no evidence in history that a strategic, serious investor was able to obtain an equity risk premium of this amount on a continual basis. Why? Because stock prices rise when the equity risk premium is this high, which is how the equity risk premium gets back to a more normal range, like 2% or 3%.

We believe the stage is set now for the US stock market to double by the end of the decade. The equity risk premium is giving us the guidance to make that statement about the valuation. It is quite possible that the Standard & Poor’s 500 Index could see 2,000 before the end of this decade arrives. The implied level for the Dow is 20,000.