Financial Accounting Blog

Saturday, February 07, 2004

investopedia has a great article titled: Technical Analysis 101:Is P/E Ratio a Good Market-Timing Indicator?
Analysts have argued for years about the merits of price/earnings (P/E) ratios. When P/Es are high, as they were in the late 1920s and 1990s, raging bulls would proclaim that the ratios are irrelevant. When P/Es are low, as they were in the 1930s and 1980s, marauding bears would argue that the worst is still ahead. Each time, both were wrong. Here we test a newly designed indicator to determine if P/Es can be effectively used to generate buy and sell signals. To get a complete picture of its effectiveness, we’ll look at whether this indicator would have helped the trader beat the returns rendered by a buy-and-hold strategy over the period from 1920 through to 2003.
posted by Rod B. 2/7/04