Thursday, February 22, 2007

Stock Prices: Under or Overvalued versus Earnings and Moving Averages

As noted on Birinyi Associates, Inc Ticker Sense website, 80% of the S&P 500 stocks are trading above 20 and 200 day moving averages. The site contains a chart highlighting instances where this has occurred since 2001. The last time this took place was in December 2004 and the market subsequently incurred a 6% correction. However, as the chart in the Ticker Sense article notes, there have been a number of occasions between 2001 and 2004 where the market continued to move higher as 80% of the S&P 500 stocks traded above their 20 and 200 day moving averages.

In spite of a large number of the S&P 500 stocks trading at prices above 200 day moving averages, the prices have not keep pace with earnings growth. The Wall Street Journal's Market Beat section summarizes an article by Joe Keating, chief strategist at First American Asset Management, that notes stock prices have not kept pace with earnings growth. As detailed in the Wall Street summary:
  • stock price movement tends to track increases or decreases in earnings.
  • earnings have grown about 45% in the past three years compared with a 27% increase in the S&P 500 Index.
Joe Keating notes, “I see very little downside risk to the market on account of that– although I do think a 5% to 7% correction would be relatively healthy."


Ticker Sense
February 22, 2007

When Prices and Earnings Don't Match Up
Market Beat
The Wall Street Journal Online
By: David Gaffen
February 22, 2007

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