June 2012 Black Monday Ready to Crash the Stock Market
So far, the “Sell in May and Go Away” strategy has followed the textbook lessons over the last few years but as you can see from the chart at the end of this article, the short-lived seasonal sell-offs have been followed by significant advances — up +33% from 2010 lows and up +29% from the 2011 lows.
Stocks are now down more than 10% from their recent peak — an official stock market correction — stocks could now keep dropping until they enter a “bear market” (20% decline), or worse.
The bigger valuation picture is still not that encouraging, at least for long-term returns. Even after the recent pullback, stocks are still about 20% overvalued when measured on Professor Robert Shiller’s “normalized” earnings–earnings adjusted to normalize profit margins. This is is one of the only valuation measures that actually bears some correlation to long-term future returns. (PE’s based on a single year of earnings can often be highly misleading).
Specifically, even after the pullback, stocks are still trading at 20X cyclically adjusted earnings — over the past century, stocks have averaged about 16X those earnings. So we’re still about 20% above normal.
The current down turn in the risk ratio on the S&P 500 signifies that the current correction is still in progress and will likely continue for at least several more weeks.
The head of the World Bank, Robert Zoellick, is about to step down after a 5-year term — that means he can say what he really thinks.
- Financial markets face a rerun of the Great Panic of 2008.
- It’s far from clear that Eurozone leaders have steeled themselves for the looming catastrophe amid fears of a Greek exit from the single currency and meltdown in Spain.
- Events in Greece could trigger financial fright in Spain, Italy and across the Eurozone. The Summer of 2012 offers an eerie echo of 2008 — If Greece leaves the Eurozone, the contagion is impossible to predict, just as Lehman had unexpected consequences.
- There will not be time for meetings of finance ministers to discuss the outlook and debate the politics — In panicked markets, investors flee to safe assets.
Tags: Adjusted Earnings, Bear Market, Catastrophe, Correction, Eurozone, Flee to Safe Assets, Great Panic of 2008, Greece, Italy, PE, Pullback, Robert Zoellick, S&P 500, Sell in May and Go Away, Spain, World Bank