“The barometric needle has switched over to the bear side”

Posted by Mike Shedlock - Richard Russell Comment

Share on Facebook

Tweet on Twitter

PE_MO2

Last week Lowry’s Selling Pressure Index crossed ABOVE its Buying Power Index, a move that I consider bearish. Thus, the barometric needle has switched over to the bear side. In the past there have been manic periods like the one we have been going through. This switch in Selling Power to the dominant position, is an early warning, and I think it behooves all subscribers to sell their regular common stocks and move to the sidelines, thereby awaiting clearer signals as the market finally calms down. Richard Russell 08/22/11 Dow Theory Letters HERE to subscribe

 

Demographic Headwinds for US Stock Prices

This evidence suggests that U.S. equity values are closely related to the age distribution of the population. Since demographic trends are largely predictable, we can forecast the path that the P/E ratio is likely to follow in the next few decades based on the predicted M/O ratio.

Figure 2 compares the actual and model-implied P/E ratios for the sample period ending in 2010. We calculate the path for the model-implied P/E during the sample period by feeding in actual M/O ratios. We call the long-run path of the P/E ratio predicted by the model the “potential P/E ratio” and designate it P/E*. Figure 2 shows that the P/E* (red dashed line) is highly correlated with actual P/E during the sample period.

PE_MO2

….read more and view Charts HERE