I strongly believe that the charts often speak themselves, you
just need to look at them from the right angle and at the right moment
- JB90

	Market commentary by JB90	aka JapanBear90 on the Bear Forum
03/16/2001	S&P 500 is still overpriced ...
	Let's multiply the federal funds yield ( a gauge for the short term interest rates) by P/E ratio in S&P 500 index, the result will be referred as a k coefficient. We all know that the higher interest rates , the less attractive become investments into stocks and vice versa. So the value of k should represent some sort of current balance between interest yields and stock prices. We plotted k coefficient on the chart below (thin dark blue line , right scale) from 1960 till the current date. Calculations show that the average k during last 40+ years is equal to ~ 1.0 (more exactly 0.975) as expected. It is constantly oscillating around its "fair" value of 1.00 , making those well known economy cycles. Years of extreme valuations are marked by sharp peaks in k value (> 1.5) in 1969, 1973 ,1981, 1987, 2000 years and subsequent drop below 1 Interestingly, that visually we tend to see k as a slightly upward trending value. And as a technical analyst I would suggest that the current bubble will finally bottom at k-value around 0.75 , finding support at the thick red line. In this case if Mr. Greenspan cuts FF yields to say 3.50% ( 0.035), then a bargain P/E should be at 0.75/0.035 = 21.4 which is about 40% higher than S&P 500 average historical multiple. But it will all depend on the severity and longitude of the recession we are headed to. Remember Japan ? If something wrong is developing inside the US economy, just a stimulating medicine in the form of interest rate cuts can't do the recovery trick. Good luck, JB90                                                                         Subscribe to our newsletter
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