Effor.com

I was reading an article on CNN tonight and happened to see these lines:

But sentiment seems to be shifting as of late.

“It’s still too early to tell,” said Thomas Nyheim, portfolio manager at Christiana Bank & Trust. “But I do think that when you have Ben Bernanke, the IMF, and all these strategists saying we are in a recession or about to see one, and the market doesn’t sell off much, that tells you something.”

I agree that sentiment is shifting - how else do you explain the stock markets’ reluctance to go down in the face of all the bad news?  It’s certainly possible that we’re “climbing a wall of worry” and that the short downturn in stocks is over - but I don’t think so.

There is too much optimism for me right now.  It seems that no matter how bad the news is, the stocks affected rally.  It’s like investors are thinking “At last, this is everything.  It’s all out there now.  Things can’t possibly get any worse, so there’s nowhere to go but up.”

I hate to be the bearer of bad news, but yes Virginia, things can get worse.  And I think they will. 

I’ve been playing with an Excel spreadsheet of earnings from Standard and Poors website.  Their 2007 estimate of $82.54 was high (actual was $70.83) and I think their 2008 estimate of $96.74 is way too high - by at least $20.

In other words, official estimates are looking for 2008 earnings to be HIGHER than the 2007 results.  I don’t think there’s anyway that’s going to happen.  The first quarter results will be a lot lower than last year (overall) and we are still in the early stages of the massive deleveraging that needs to happen as the housing market gets worse.

Stocks might be higher a month from now - but I doubt it.  They might be higher 6 months from now, but I doubt that too.  Unless there’s a massive (1500 to 2000 point) correction in the DJIA between now and then, stocks will continue to trade in the 12800 to 12200 range.

We may go down slowly, or we may see a huge two or three day slide, but stocks WILL eventually correct to reflect the earnings.  I’m just sitting on the sidelines waiting for that to happen.  If it doesn’t happen (I’ll be very surprised!) I’ll get back into the market when the 75 day EMA crosses over the 200 day EMA.  And we’re nowhere close to that happening.

gk