P/E10 Sequences A

I brought up the Scenario Surfer. I repeated P/E10 Sequences with a P/E10=14 Normal Market instead of a Bear Market.

My conclusion: start from very high or very low P/E10 levels for estimating turning points. Intermediate P/E10 levels are appropriate only for short periods of time.

Scenario Surfer Conditions

I set the Scenario Surfer to a P/E10=14 Normal Market. I determined how P/E10 varied over the next 20 years.

Data

Run 1.
Year 5 P/E10=12.9
Year 10 P/E10=12.9
Year 15 P/E10=5.4
Year 20 P/E10=8.2

Run 2.
Year 5 P/E10=13.5
Year 10 P/E10=10.5
Year 15 P/E10=7.5
Year 20 P/E10=7.3

Run 3.
Year 5 P/E10=11.6
Year 10 P/E10=17.0
Year 15 P/E10=12.4
Year 20 P/E10=11.7

Run 4.
Year 5 P/E10=11.6
Year 10 P/E10=10.8
Year 15 P/E10=21.4
Year 20 P/E10=24.2

Run 5.
Year 5 P/E10=17.9
Year 10 P/E10=12.8
Year 15 P/E10=17.6
Year 20 P/E10=24.3

Run 6.
Year 5 P/E10=10.7
Year 10 P/E10=8.1
Year 15 P/E10=9.5
Year 20 P/E10=14.5

Run 7.
Year 5 P/E10=13.4
Year 10 P/E10=11.1
Year 15 P/E10=6.1
Year 20 P/E10=8.5

Run 8.
Year 5 P/E10=17.4
Year 10 P/E10=11.3
Year 15 P/E10=19.4
Year 20 P/E10=9.1

Run 9.
Year 5 P/E10=22.1
Year 10 P/E10=22.6
Year 15 P/E10=11.0
Year 20 P/E10=14.7

Run 10.
Year 5 P/E10=25.1
Year 10 P/E10=16.4
Year 15 P/E10=22.9
Year 20 P/E10=14.4

P/E10 Sequences

Sorted by Run Number

Run 1: 12.9; 12.9; 5.4; 8.2
Run 2: 13.5; 10.5; 7.5; 7.3
Run 3: 11.6, 17.0; 12.4; 11.7
Run 4: 11.6; 10.8; 21.4; 24.2
Run 5: 17.9; 12.8; 17.6; 24.3
Run 6: 10.7; 8.1; 9.5; 14.5
Run 7: 13.4; 11.1; 6.1; 8.5
Run 8: 17.4; 11.3; 19.4; 9.1
Run 9: 22.1; 22.6; 11.0; 14.7
Run 10: 25.1; 16.4; 22.9; 14.4

Sorted by Year 5 P/E10

Run 6: 10.7; 8.1; 9.5; 14.5
Run 3: 11.6, 17.0; 12.4; 11.7
Run 4: 11.6; 10.8; 21.4; 24.2
Run 1: 12.9; 12.9; 5.4; 8.2
Run 7: 13.4; 11.1; 6.1; 8.5
Run 2: 13.5; 10.5; 7.5; 7.3
Run 8: 17.4; 11.3; 19.4; 9.1
Run 5: 17.9; 12.8; 17.6; 24.3
Run 9: 22.1; 22.6; 11.0; 14.7
Run 10: 25.1; 16.4; 22.9; 14.4

In a Normal Market, P/E10 sequences are just about as likely to have increased as decreased at Year 5.

Only in one out of ten runs did P/E10 drop below 11.0. In two out of ten runs, P/E10 rose above 20.0.

Sorted by Year 10 P/E10

Run 6: 10.7; 8.1; 9.5; 14.5
Run 2: 13.5; 10.5; 7.5; 7.3
Run 4: 11.6; 10.8; 21.4; 24.2
Run 7: 13.4; 11.1; 6.1; 8.5
Run 8: 17.4; 11.3; 19.4; 9.1
Run 5: 17.9; 12.8; 17.6; 24.3
Run 1: 12.9; 12.9; 5.4; 8.2
Run 10: 25.1; 16.4; 22.9; 14.4
Run 3: 11.6, 17.0; 12.4; 11.7
Run 9: 22.1; 22.6; 11.0; 14.7

Year 10 P/E10 values were below 11.0 in three out of ten runs.

Year 10 P/E10 values rose above 16.0 in three out of ten runs.

Sorted by Year 15 P/E10

Run 1: 12.9; 12.9; 5.4; 8.2
Run 7: 13.4; 11.1; 6.1; 8.5
Run 2: 13.5; 10.5; 7.5; 7.3
Run 6: 10.7; 8.1; 9.5; 14.5
Run 9: 22.1; 22.6; 11.0; 14.7
Run 3: 11.6, 17.0; 12.4; 11.7
Run 5: 17.9; 12.8; 17.6; 24.3
Run 8: 17.4; 11.3; 19.4; 9.1
Run 4: 11.6; 10.8; 21.4; 24.2
Run 10: 25.1; 16.4; 22.9; 14.4

P/E10 was below 8.0 at Year 15 in three out of ten instances.

P/E10 was above 19.0 at Year 15 in three out of ten instances.

Sorted by Year 20 P/E10

Run 2: 13.5; 10.5; 7.5; 7.3
Run 1: 12.9; 12.9; 5.4; 8.2
Run 7: 13.4; 11.1; 6.1; 8.5
Run 8: 17.4; 11.3; 19.4; 9.1
Run 3: 11.6, 17.0; 12.4; 11.7
Run 10: 25.1; 16.4; 22.9; 14.4
Run 6: 10.7; 8.1; 9.5; 14.5
Run 9: 22.1; 22.6; 11.0; 14.7
Run 4: 11.6; 10.8; 21.4; 24.2
Run 5: 17.9; 12.8; 17.6; 24.3

P/E10 was below 8.0 at Year 20 in one out of ten instances.

P/E10 was above 20.0 at Year 20 in two out of ten instances.

Turning Points

These data were inconclusive. Based on history, there is likely to be a turning point within 10 or 15 years.

Conclusions

Today’s market is a long lasting (secular) Bear Market, not a Normal Market. In a Normal Market, P/E10 is unlikely to fall in the next ten years to the very low values that we have seen historically.

It appears to be better to start from a very high or very low P/E10 level for predicting turning points.

Have fun.

John Walter Russell
February 4, 2009