Dow Entry Level at 6,000?

Robert Shiller, professor of finance at Yale University and chief economist for MacroMarkets LLC, tracks what he calls the "Graham P/E," a measure of market valuation he adapted from an observation Graham made many years ago. The Graham P/E divides the price of major U.S. stocks by their net earnings averaged over the past 10 years, adjusted for inflation. After this week's bloodbath, the Standard & Poor's 500-stock index is priced at 15 times earnings by the Graham-Shiller measure. That is a 25% decline since Sept. 30 alone.

The Graham P/E has not been this low since January 1989; the long-term average in Prof. Shiller's database, which goes back to 1881, is 16.3 times earnings.

But when the stock market moves away from historical norms, it tends to overshoot. The modern low on the Graham P/E was 6.6 in July and August of 1982, and it has sunk below 10 for several long stretches since World War II -- most recently, from 1977 through 1984.


It would take a bottom of about 600 on the S&P 500 to take the current Graham P/E down to 10. That's roughly a 30% drop from last week's levels; an equivalent drop would take the Dow below 6000.


Source: http://gregmankiw.blogspot.com/

Is it safe to enter the stock market when Dow comes down to 6,000?? Or 8,000?? Risk comes from not knowing what you are doing. If you dont know what you are doing, why rush to buy now when the market is still in turmoil? Ask yourself, "Is it worthy to risk losing money when you think the bottom is still far away"? Why go against the tide? Capital preservation is the key now. The market will always be there. It wont go away. Be patient and think rationally!! Do your homework before you buy. Always be prepared. Like Charlie Munger said, "Opportunity comes to the prepared mind".