Is the Stock Market Getting Ready to Crash?

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The SPX Investing Program
Is the Stock Market Getting Ready to Crash?
Bulls, Bears, and the Clueless
People who have an opinion about the Stock Market usually fall in to one of 3 categories:
1. Bulls (up)
2. Bears (down)
3. Clueless
Bulls
For the most part, the stock market usually goes up.
People who are positive about the future are usually bullish.
Bears
There are times when the stock market can have extended declines.
Those who are negative about the future of the stock market are called Bears.
How Earnings are Reported
Earnings are the fundamental core of what makes a company more valuable or less valuable.
Publicly traded companies use GAAP to report earnings.
Generally Accepted Accounting Principles (GAAP).
GAAP requires the accrual accounting method, which recognizes costs and expenses when they occur rather than when actual cash is received or paid out.
The matching principle of accrual accounting requires that companies match expenses with revenue recognition, recording both at the same time.
Earnings Impact
Many investors buy or sell stocks as earnings go up and down in a company.
However, sometimes there can be a large and extended disconnect between earnings and stock prices.
It can take months, or even years for earnings to come in-line with stock prices.
When these measurements are far apart, something will need to change.
Price/Earnings Ratio
One thing investors watch is whether stocks are considered expensive or cheap.
Typically, investors will want to buy stocks that are considered cheap and sell stocks that are considered expensive.
A stock with a high P/E Ratio is considered expensive.
Other investors use the P/E Ratio as a measurement of supply and demand.
When investors are buying a stock and the price goes up, this often shows an increase in demand.
When investors are selling a stock and the price goes down, this often shows a decrease in demand, or an increase in supply.
Price/Earnings Ratio Calculation
The P/E Ratio changes every day and is usually marked to the market by using the closing price for calculation.
The current price is divided by the annual earnings that have already been report.
The trailing Twelve months (TTM) based on GAAP earnings reports is what is used.
There are also forward earnings which are guesses or estimates.
P/E Ratio for Indexes
A P/E Ratio can be calculated and applied to an index, such as the S&P 500 (SPX).
The Multiple
The P/E Ratio may offered be referred to as “The Multiple”.
Stock prices will usually be priced at a multiple of the P/E Ratio.
Stocks are usually measured according to 3 multiples:
10 times earnings = cheap
15 times earnings = fair
20 times earnings = expensive.