"BOSTON (MarketWatch) — Buying opportunity? To some, that’s what the recent turmoil in the world and in the equity markets, including this week’s declines in the Dow industrials, means. To others, however, it’s further evidence of the need to go light on stocks.
At least that’s the opinion of Christopher R. Pavese, a chartered financial analyst and chief investment officer of Broyhill Asset Management.
“I’ve been scratching my head for weeks wondering why the equity market has been completely ignoring (the turmoil in the Middle East),” said Pavese, who is also the president of the CFA North Carolina Society. “And I don’t think that a 1.4% correction in the U.S. stock market represents a buying opportunity especially since the market is trading at more than 24 times normalized earnings.”
In fact, current conditions — both from valuation and historical perspectives — represent more a selling opportunity than anything else, according to Pavese, who just wrote a blog entry on the subject.
In an interview, he said current market is reminiscent of two other times in history when we’ve had “Monster Rallies,” where the markets doubled in short period of time and then fell.
“Unnervingly, there have been only two other times when the market has rallied so sharply over this time period,” Pavese wrote in his blog. “Neither of them occurred during raging bull markets. In fact, both of them (one 1934 and the other in 1937) occurred during the secular bear market of 1929 to 1942. Over this period, normalized valuations, as measured by cyclically adjusted price to earnings ratio or CAPE, fell from a peak of 32.6 to a trough of 5.6. While there were occasionally powerful rallies throughout this cycle, investors were well served waiting for lower valuations and/or extreme oversold conditions before dipping their toes in the water.” (CAPE is a measure that takes into account inflation.)"
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