Are Stocks Cheap?

Many people are wondering if this is a good time to buy. The prevailing theory is that the stock market looks 6 months out and many sources are claiming the recession will bottom by Q2 2009 and end in a two year long recession.

I think it's a sucker rally.

See the below chart for a simple breakdown of S&P500 Earnings and what the equivalent PE ratio would mean for the target price. Historically, the S&P500 has a PE of 15. 12 is used here to illustrate the likely initial overcorrection.

Earnings PE Target
$25.00 12 300
$35.00 12 420
$45.00 12 540
$55.00 12 660
$25.00 15 375
$35.00 15 525
$45.00 15 675
$55.00 15 825
$25.00 18 450
$35.00 18 630
$45.00 18 810
$55.00 18 990

So, in other words if the S&P500's earnings are $45, a PE of 15 puts us at a 675 target price. We're around 900 today. We could have a little rally here, but I think some sort of fear event will pull us down... maybe it'll be the jobs report tomorrow.

Source: MIKE MISH SHEDLOCK @ http://www.financialsense.com/