US stocks are cheaper than all the past 34 peaks since 1989 due to a doubling of corporate profits since 2009. However, this has not stopped trader’s appetite for protection against losses as the market continues to power ahead without a real pullback. Traders currently have increased the prices of contracts that will profit from a 20% decline in the S&P 500 ((NYSE:SPY) mostly due to a fear that the global recovery is weakening and the stock market will follow suit.
US stocks currently have an average price to earnings ratio of 14.1 and have advanced 102% since 2009. However, according to the bears (a group we are part of), stocks are not cheap due to other market valuations and macro concerns. Stocks are cheap because analysts are too optimistic in their predictions and forecasts. As of right now, analysts are predicting corporate profits to continue hitting records through 2013.
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Bulls say that corporate profits are helping traders see some of the light as other fear factors persist. The Bulls also say that the market rally will continue because Europe is finally taking big steps to managing its debt load and a US double dip looks almost impossible at this point. A number of important economic indicators have also pointed to recovery as of late such as housing, unemployment, consumer confidence, etc.
Most of the fear stems from a very volatile 2011 as well as war flashbacks of 2008, making traders be extra careful on their bets. However, you can not deny the market after it has posted the best January and February in nearly 15 years. Obviously, investors are a little optimistic, you have to be after this great start to 2012. Nine quarters of straight earnings growth has outpaced the S&P’s gains which has given valuations decade low levels. This should be huge for investors and be giving people confidence that the rally is real along with the recovery.
Looking at the Bear’s point of view, I see merit as well. The market has rallied huge over the past few months with no real pullback. It only makes sense that the market should be ready to take a breather here in the near future. However, I disagree with the Bears on the earnings situation. Corporate earnings are up because corporations are finally getting back to basics and profitable business operations since 2008 caused most of the business world to reshuffle their business plans.
Ultimately, I think this rally is due for a breather but that doesn’t mean it is a false rally. The factors behind the rally hold true and will be a source of optimism for the rally to continue after the pullback.