Re: Dow 36,000
Fri, 22 Oct 1999 09:40:31 -0700

I don't think that the Shiller paper falls into the category of "technical analysis", anyway. Technical analysis is distinguished from fundamental analysis by its emphasis on patterns in price movements independent of the fundamentals of the stock (its earnings, market prospects, etc.). You could show a market technician a price chart and not tell him what it was prices of - could be an Internet stock, a Treasury bond, pork belly futures, anything - and he would apply the same techniques to look for patterns and make predictions.

In the case of Shiller, yes, he is looking at charts and looking for correlations between data sets. But the figures he is looking at, prices, earnings, and their ratios, are generally considered part of fundamental analysis, not technical. P/E's are the basic tool of the fundamentalist, the first method he uses to judge whether a stock is fairly valued and how much it is likely to appreciate.

All Shiller has done in this context is to calculate P/E's a little differently, using 30 year average earnings instead of current year earnings, and then to compare them to price appreciation over a ten year period. He's also looking at the market as a whole rather than at individual stocks. But this is squarely in the fundamental analysis camp and is a very reasonable and natural way to apply fundamental theory.

Just because he used a chart to display his results doesn't make him a chartist or a technician! He could have simply listed his regression fit parameters in numeric form and made his predictions on that basis. But then only a statistician would have a good feel for how good the fit actually was. Displaying the data in chart form makes it understandable to a much wider audience.

My main concern with the market is how it will react to the next extended decline. It can't go up forever. Once we hit a bear market that lasts a year or more, it will test the faith of investors who have seen stocks do nothing but go up at record breaking pace. To the extent that today's historically high valuations are due to investor psychology built on a decade long expansion, a change in that psychology may bring the market back to more normal P/E levels.