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Issue No. 51 – November 7, 2005 Prescott, Arizona Systems@WiserTrader.com
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1.0 Trading
PE values measured relative to those of a stock’s industry take into account the variation in mean PE from one industry to another.
1.1 Ratio of PE to Industry PE
Analysis of September 2004 market data indicated that a PE of less than 10 provided the lowest probability of loss over the following year that ended in mid September 2005. The relationship is a moving target, however, because a month later in October 2004 the major averages began at higher starting values and ended lower in mid October 2005. The October 2004 analysis showed that a year ago PE of 15 or less provided the lowest probability of loss over the following year. This shows how dynamically the markets can change in a short time.
It is useful to compare the impact of absolute values of PE with values specified as multiples of their industry averages. A PE of 10 or 15 would be considered out of line for the Oil & Gas industry with an average PE of 6 and a super value for the Semiconductor Equipment and Materials industry with an average PE of over 100. A comparison is made between absolute PE’s in Figure 1 and industry relative vales of PE in Figure 2 over the year ending in mid October 2005.
The lowest risk of loss occurred for PE’s in the range of 10 to 15 in Figure 1 and for companies having a PE of 0.5 to 0.75 of their industry average in Figure 2. One might expect even lower PE’s to provide a lower risk of loss. But lower PE’s were accompanied with a higher risk of loss as well as a higher probability of the highest gains. As seen before, PE doesn’t tell the full story of a stock’s value. In some cases a lower PE can indicate stocks that were priced out of favor due to declining sales, return on equity or other reasons.
© 2005 Desert Mountain Systems, LLC. Members of wisertrader.com are neither licensed brokers nor licensed advisors. Trades discussed represent recommendations made by the editor for the wisertrader.com portfolio. The newsletter and web site are for information only and should not be considered as personal advice. While it is believed that the posted information is factual, mistakes can be made in transcription. Investors should trade stocks only after verifying all information and consulting with a licensed broker or adviser. Desert Mountain Systems markets third party trading systems but has no other affiliation with trading system companies.
FIGURE 1
FIGURE 2
2.0 Market Analysis
With the exception of auto sales, same store sales data lead to a market rally this week. Retail, energy and financials were the market leaders this week. About 85% of S&P500 companies have reported that earnings are likely to reflect a 15% gain over the same quarter last year. Earnings forecasts for the fourth quarter remain in the 12% to 15% range.
Key industry ETF’s in Table 2A are Biotech and Semiconductors which confirm the NASDAQ. Transportation confirms the Dow Jones Industrial Average according to Dow Theory. Banking and Financials are confirming indicators for the S&P 500. Gold and Real Estate are respective indicators for the inverse health of the currency and the capacity for consumer spending.
Table 2A
Indices, Key Industry ETF’s and Sector SPDR’s
|
|
1 month |
1 wk ago |
2 wks ago |
3 wks ago |
4 wks ago |
|
Dow Jones Industrials |
2.3% |
1.2% |
1.8% |
-0.7% |
0.0% |
|
NASDAQ |
3.8% |
3.8% |
0.4% |
0.8% |
-1.2% |
|
S & P 500 |
2.0% |
1.8% |
1.6% |
-0.6% |
-0.8% |
|
Russell 2000 |
2.1% |
3.6% |
0.4% |
-0.1% |
-1.7% |
|
GLD, GOLD |
-3.9% |
-3.6% |
1.5% |
-0.6% |
-1.2% |
|
RKH, Banking |
5.6% |
0.4% |
2.6% |
2.0% |
0.4% |
|
IYT, Transportation |
7.4% |
5.4% |
3.0% |
-0.3% |
-0.8% |
|
SMH, Semiconductors |
-0.5% |
5.9% |
-4.1% |
0.8% |
-2.8% |
|
BBH, Biotechnology |
9.2% |
6.0% |
2.6% |
-0.8% |
1.2% |
|
IYR, Real Estate |
-0.1% |
-1.2% |
2.5% |
-0.1% |
-1.3% |
|
OIH, Oil |
5.2% |
3.2% |
6.5% |
-2.5% |
-1.8% |
|
XLE, Energy |
-0.1% |
2.5% |
4.9% |
-4.8% |
-2.4% |
|
XLU, Utilities |
-4.3% |
-0.5% |
2.3% |
-1.7% |
-4.4% |
|
XLB, Materials |
4.7% |
1.3% |
3.6% |
0.8% |
-1.0% |
|
XLI, Industrial |
1.0% |
1.5% |
1.2% |
-1.1% |
-0.6% |
|
XLK, Technology |
3.4% |
3.4% |
0.2% |
0.8% |
-1.0% |
|
XLV, Healthcare |
-0.3% |
1.3% |
0.1% |
-1.9% |
0.2% |
|
XLF, Financials |
5.1% |
1.1% |
3.2% |
1.0% |
-0.2% |
|
XLP, Consumer Staples |
1.5% |
0.4% |
0.9% |
0.5% |
-0.4% |
|
XLY, Consumer Discretionary |
2.6% |
3.9% |
0.1% |
-0.4% |
-1.0% |
