CI Outlook - Archives

September 2007

September 6, 2007

According to Lowry’s investment research this August was the most volatile 29 day trading period in the last 60 years.  Although extreme, this is classic action for a market correction based on time rather than price.  The interesting point of all of this frenetic activity is that it accomplished nothing in the area of price.  As wild as the market appeared to be, prices ended up about 1% for the month.  That is not a lot of progress for a month that included days with record trading volume and emotional meltdowns by well-known television commentators and hedge managers alike.

Currently it appears we are correct in our prior assumption, that this correction would be more in time than in price.  In August the market certainly entered a violent, emotional, and extended trading range.  We think the containment of prices in this range remains probable, but we have no idea as to the length of time the market will remain at this level.  We believe the eventual resolution of this sideways range will come with a resumption of prices to the upside.  This is based on our belief that despite a meltdown in housing, and slower growth in the job market, the economy will not slip into recession.  We think economic growth will slow dramatically, but without a recession earnings growth for many companies should remain positive.  Therefore current earnings estimates for 2008 remain attainable.

Currently those earnings estimates for the Dow Industrials are at $888 per share.  According to our model, at current rates of interest, the projected central value for the Dow next year is about 14,600.  Assuming 15% levels of market volatility, that should result in market lows of 12,400 and highs of 16,800.  Given these valuations the intraday trading low of 12,500 on August 16th was likely the market bottom for the foreseeable future.  Also, a move of 10% above current levels seems justified by current earnings and interest rates.  As to the question of when we will break out of this trading range and resume the market uptrend, we have no answer.  We can only say that is up to the investing public’s psychological ability to resume taking normal investment risk.

 

CJ Brott                                     Karen Burns

 


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