No. Incorrect. At 6000 it would be just a bit under fair value. Can your crumpet of a mind wrap itself around the following chart?
"if the dow went to 6,000 stocks would be sickly undervalued. " Yes, if using the valuation levels of today. But possibly no if using the valuation levels of the future. Anyway, that quote reminds me of some bubble head sprouting off on CNBC. How many times do you think that channel has had guests on (over the last 12 months), or the hosts themselves have suggested that 'now is the time to buy, stocks are looking good value going forward'? About 10 times on average per day. They'll be right one day
Plus of course asset prices can remain undervalued for long periods of time. Just as they can remain overvalued for long periods of time. Just because it's undervalued, doesn't mean it's going up. Plenty of great antiques for example are starting to sell as crazy values, well under what they're really worth but the market still (and rightly so) is going lower. They're not so much antiques per se but stone aged tools circa 5000 BC are great bargains right now, they're almost giving them away.
You have to also keep in mind that stock_trad3r is a college student so he doesn't have much life experience and even less market experience so he doesn't fully understand all the angles. We should cut him a little slack.
ST is an even bigger mess than you describe. He/she is upside down. He/she is long in a falling market and short in a rising one.
This scenario sounds very plausible in the near future, after China has dumped most of its holdings in US treasuries.
using what metric ?? the s and p is now grossly overvalued. earnings are forecast to be $42 for the sp500 for 2009 .. That number will obvioulsy come down . at spx 800 with $40 in earnings .. brings the p/e of the sp500 to 20 !! way to high .. p/e for the sp 500 should be between 12 -15 in this environment .. which is 580-650 .. that's fair value ..
He's a kid in school and he is a hobbyist trader so its clear he doesn't have a lot of money riding on what happens. Youth and inexperience will lead to bold and, well, not so bright decision making. But he'll learn (hopefully) P.S He never goes short, you know that right?
I was living, but not trading, In Argentina in 2002. The best pickup line was joked to be "I have an offshore bank account" as the peso crashed to, um, where it is again today. This time there is no offshore. real estate held up waay better than cash but people couldnt get loans to buy it (obviously a 3rd world thing in general, but it was even harder from what I anecdotally heard). A lot of people lost a lot.