The markets were up BIG today on No News.  Today marks “Day Nr. 1” of a possible turn in the market.  Ideally, it would happen on tremendously out-sized volume, but it didn’t.  It didn’t happen in February either, but the market still rallied for over two months, climbing a “wall of fear”.  We capitalized on it strongly.

The market however is a bit different now than in February.  The Federal Reserve has gradually shut-off most of the extraneous stimulus programs that were put in place during the market meltdown in 2008-2009, so investors are left to focus purely on expected earnings and weigh such information against concerns for trouble in Europe, a slowdown in China, and fiscal concerns of individual states and municipalities here in the U.S.  The news isn’t good, but that didn’t stop the market today from showing some real fervor.

Let’s make this clear- There is absolutely no reason for a renewed bull-market to emerge at this point.  Today, analysts announced expectations for Alcoa’s quarterly earnings to come in at about a dime a share.  Multiply that by 4 to get annual earnings and we arrive at $0.40/share.  Divide the current share price of $10.55/share by 0.40/share earnings and we arrive at a price earnings ration (P/E) currently on Alcoa at 26.  That is simply too high.  The market average currently is around 17.  Just to arrive at a P/E of 17, Alcoa stock would have to lose about -34.5% if they can’t get their earnings up.  That would take their share price down to around $7/share.

Demand is not increasing any time soon, so the only way to improve earnings is to cut costs – which companies have been doing aggressively for the last 2 years.  There just isn’t too much left there.

Historically, bear markets have exhibited some powerful bounces.  But they were only bounces within an overall downward trajectory that left stocks in a heap of rubble, with P/E ratio’s averaging approximately 7.

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