Greenspan's Rallying Cry: Separating Sense From Nonsense

Stocks' winning streak ended today, as the S&P 500  (SNPINDEX: ^GSPC  ) , and the narrower, price-weighted Dow Jones Industrial Average (DJINDICES: ^DJI  ) both declined 0.2%. I'm highly skeptical concerning technical analysis, the pseudo-scientific discipline which seeks out patterns in price and volume data and ignores all fundamentals. Nevertheless, I have to admit that the S&P 500's Oct. 2007 record (nominal) high is proving remarkably resistant to this rally. Today will mark the sixth consecutive day on which the index closes within 1% of this level (it has not crossed it on an intraday basis, either.)

"Irrational exuberance" -- then and now
It's almost as if traders are skittish about crossing into uncharted waters; that would be odd, as I have yet to see a "here be dragons" warning beyond 1,565.15 on my S&P 500 price graph. If Captain Greenspan were still piloting this ship, surely we would have motored right through these waters by now. "Irrational exuberance is the last term I would use to characterize what is going on at the moment," he told CNBC morning, adding that this bull market has "still got a ways to go as far as I can see."

Option traders must have heard his reassuring words; despite stocks' decline today, the VIX Index (VOLATILITYINDICES: ^VIX  ) , Wall Street's fear gauge, was flat on the day, closing at 11.30. This ultra-low level is not uncharted waters per se -- we are at the threshold for the bottom 3.5% of values going back to the Jan. 1990 inception of the index -- but it is the equivalent of highly unusual meteorological conditions. (The VIX is calculated from S&P 500 option prices, and reflects investor expectations for stock market volatility over the coming thirty days.)

It's not clear why one should listen to Mr. Greenspan when it comes to the stock market's valuation, as his record on that front is hardly unblemished. It turns out that he was probably right when he made his most famous "call," famously referring to investors' "irrational exuberance" in a speech on Dec. 5, 1996. Indeed, from that day's close through today, the S&P 500 has risen less than 2.3% on an annualized basis, after inflation, which is significantly less than the long-term historical average. Oddly, though, when he delivered that speech, stocks were only about one-fifth more expensive than they are today with regard to their cyclically adjusted earnings.

Are you finally ready to invest on the basis of fundamentals, valuation, and competitive advantage? If so, the Motley Fool's chief investment officer has selected his No. 1 stock for this year. Find out which stock it is in the brand-new free report, "The Motley Fool's Top Stock for 2013." Just click here to access the report and find out the name of this under-the-radar company.


Read/Post Comments (0) | Recommend This Article (3)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2316522, ~/Articles/ArticleHandler.aspx, 11/28/2014 7:44:35 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement