Does the Current S&P 500 Price Jive with Reality?

If you watch the stock market closely each day and follow analyst reports from the financial media, then you have been inundated with talk about the Price-to-Earnings Ratio (P/E) of the broader stock market (i.e. - the S&P 500). The historical "average" for the S&P 500 is a P/E of 14-15. When I look at this "average" valuation, I assume that the possible risks that could hurt the economy are also "average". With the S&P 500 sitting right at the average P/E ratio, one should ask are we in an "average" period of global uncertainty? Given the crisis in Europe, China slowing, and the US sputtering along with a fiscal cliff hanging in the balance - I would say the risks are "above average".

Latest Fed Speak Shows Desperation

Boston Federal Reserve President Eric Rosengren came out on CNBC yesterday to say that the Fed should start QE 3 by purchasing mortgages in order to lower interest rates for borrowers. Now, keep in mind that one Fed president's opinion is not a game-changer. However, let's pretend that the Fed's next option for QE 3 is to buy up mortgages to suppress interest rates. If this news were to hit, the markets would rally initially in expectations that "this time it's different". The really important factor is whether or not purchasing mortages will help spur the housing market (and hence the rest of the economy). Okay, if you haven't fallen asleep yet (then you're a nerd like me) - why would banks lend money out for 30 years at mortgage rates any cheaper than they are today? What will ensue, is the fact that banks will only lend to very high quality creditworthy borrowers, thereby suppressing the housing market. Even mortgage refi's will be depressed due to skeptical banks that would like to have a better return on investment than 2% for 30 years. P.S. - On a side note, does the Boston Fed Prez look like Craig T. Nelson from the TV series "Coach"?

S&P 500 Looking "Toppy"

Today - the S&P 500 closed at 1394, just 6 points below the key phsychological level of 1400. Looking at the chart provided, this is a key resistance level to maintain the downtrend from the highs set in the spring of this year. If you are a bull, then selling at these levels may be a wise decision for the short-term. The next entry-point to go long would be at the 50-day moving average. If you are a bear, this creates an excellent point to go short and ride down to the 50 day moving average with the expectation that the S&P 500 will break these levels. There hasn't been any news out lately to justify a break above 1400-1408, but that could always change if a EU Finance Minister comes out and says "we are going to plan to make a plan" - unless the market wakes up and calls their bluff. Therefore, as a risk managment strategy - a trader should play the range of the 50 day moving average as possible support and the 1400 level as resistance. This may seem elementary, but the high-frequency trading machines have these levels as their trigger points either up or down.

A "Knight"-mare on Wall Street

Knight Capital Group (KCG) has been in the news the past two days for a software glitch that has brought the company to its knees in a little more than 24 hours. The software malfunction caused the electronic trading system to rack-up hundreds of millions of dollars worth of losses, approximately half of the company's market cap. Currently, the company is considering bankruptcy options. It is amazing to me that a software glitch can bring down a billion dollar company in 15 minutes of trading. So what are the future ramifications from this event, and how will it affect your finances? The regulatory sharks are sharpening their teeth as we speak (or type), and the news will start to trickle out on how more regulatory measures are needed for financial institutions. The one positive that will come from this horrendous debacle is the fact that people will continue to question the use of machines over people to process orders. This also sheds light on how setting stop-orders and walking away from your computer could really bite you in the ace.