Turning Points A

I have previously examined P/E10 Sequences on the Scenario Surfer with P/E10=14. My conclusion was that I should start from very high or very low P/E10 levels for estimating turning points.

This time I looked at a P/E10=26 Bear Market. The turning point estimates are reasonable.

Scenario Surfer Conditions

I set the Scenario Surfer to a P/E10=26 Bear Market. I determined how P/E10 varied over the next 20 years.

Turning Points Data

Run 1.
P/E10=14 or lower in Year 11
P/E10=10 or lower in Year 11
P/E10=8 or lower never
Lowest P/E10=9.2
Year 20 P/E10=20.2

Run 2.
P/E10=14 or lower in Year 12
P/E10=10 or lower in Year 16
P/E10=8 or lower in Year 18
Lowest P/E10=7.9
Year 20 P/E10=10.1

Run 3.
P/E10=14 or lower in Year 8
P/E10=10 or lower never
P/E10=8 or lower never
Lowest P/E10=11.3
Year 20 P/E10=19.9

Run 4.
P/E10=14 or lower in Year 8
P/E10=10 or lower never
P/E10=8 or lower never
Lowest P/E10=13.6
Year 20 P/E10=15.6

Run 5.
P/E10=14 or lower in Year 3
P/E10=10 or lower never
P/E10=8 or lower never
Lowest P/E10=10.9
Year 20 P/E10=12.7

Run 6.
P/E10=14 or lower in Year 8
P/E10=10 or lower in Year 12
P/E10=8 or lower in Year 14
Lowest P/E10=5.6
Year 20 P/E10=7.4

Run 7.
P/E10=14 or lower in Year 6
P/E10=10 or lower never
P/E10=8 or lower never
Lowest P/E10=10.8
Year 20 P/E10=22.2

Run 8.
P/E10=14 or lower in Year 10
P/E10=10 or lower never
P/E10=8 or lower never
Lowest P/E10=11.5
Year 20 P/E10=13.7

Run 9.
P/E10=14 or lower in Year 7
P/E10=10 or lower in Year 8
P/E10=8 or lower never
Lowest P/E10=9.0
Year 20 P/E10=26.0

Run 10.
P/E10=14 or lower in Year 9
P/E10=10 or lower in Year 9
P/E10=8 or lower in Year 13
Lowest P/E10=7.5
Year 20 P/E10=10.9

Data Summary

P/E10=14 or lower in Years 11, 12, 8, 8, 3, 8, 6, 10, 7, 9.

P/E10=10 or lower in Years 11, 16, never, never, never, 12, never, never, 8, 9.

P/E10=8 or lower in Years never, 18, never, never, never, 14, never, never, never, 13.

Lowest P/E10=9.2, 7.9, 11.3, 13.6, 10.9, 5.6, 10.8, 11.5, 9.0, 7.5.

Year 20 P/E10=20.2, 10.1, 19.9, 15.6, 12.7, 7.4, 22.2, 13.7, 26.0, 10.9.

Data Analysis

P/E10=14 in every instance. This occurred between Years 3 and 12. The median amount of time was 8 years.

P/E10=10 or lower occurred in 5 out of 10 runs. When it did occur, the median amount of time required was 11 years.

P/E10=8 or lower occurred 3 times out of 10. When it did occur, the median amount of time required was 14 years.

The lowest value of P/E10 ranged from 5.6 to 13.6. The middle values of the lowest P/E10 were 9.2 and 10.8. [The median was 10.0.]

The Year 20 P/E10 ranged from 7.4 to 26.0. The middle values of the Year 20 P/E10 were 13.7 and 15.6. [The median was 14.65.]

Conclusions

Using a P/E10=26 Bear Market produces a reasonable range of outcomes.

These results are consistent with the October 2008 meltdown.

There is a good chance, about 50%-50%, that P/E10 will fall below 10. There is a non-trivial possibility that P/E10 will fall below 8.

The market bottom is most likely to be close to P/E10=10. It could easily be below P/E10=6. This has happened before.

The likely market P/E10 values will return to normal by Year 20. By then, there will be a lot of randomness.

We can use P/E10=26 Bear Market data to estimate turning points.

Have fun.

John Walter Russell
February 6, 2009