Stock Market Report- May 1, 2002

May 1, 2002

Monthly Stock Market ReportThis document is for internal use only. The document or any of its contents shouldnot be distributed outside of the Federal Reserve System without permission.

Market Analysis for Period Ending Friday, April 26, 2002

This document presents technical and fundamental analysis commonly used byinvestment professionals to interpret direction and valuation of equity markets,as well as tools commonly used by economists to determine the health offinancial markets and their impact on the domestic United States economy. Thepurpose is to provide a synopsis of equity markets from as many disciplines aspossible, but is in no way an endorsement of any one mode of study or source ofadvice on which one should base investment decisions.

Definitions of terms and explanations of indicator interpretation follow thecharts in the Endnotes section.

Technical TrendsFigure 1 presents price trends and daily volumes for the New York StockExchange and Nasdaq Composite Indices.

The New York Stock Exchange Composite Index (NYSEIndex) closed Friday, April 26 at 574.32. This level marked a13.4 percent decline since the recent high of 663.56 on May 21,2001. The index has risen 13.9 percent since September 21, thelow point following the terrorist attacks, but is down 2.6 percentfrom the start of 2002. The National Association of Securities Dealers CompositeIndex (Nasdaq Index) closed at 1663.89, its lowest point sinceOctober. Between January 1, 2001 and April 26, 2002, theNasdaq Index fell 32.7 percent. The index has fallen 9.8 percentin April and is down 14.7 percent for the current year (figure 1).

Figures 2, 3, and 4 present some technical indicators commonly cited bystock market analysts.

As of April 26, the relative strength index for the NYSEComposite had a value of 34.7 percent, still in neutral territorybut approaching levels usually interpreted as bullish (figure 2,upper panel). The number of stocks falling to new 52-week lowscontinues to decline, while the number of stock making newhighs had risen until the last few days (figure 3 upper panel).The middle panel shows that momentum (overbought/oversoldoscillator) remains in overbought territory, though it is falling,which is usually interpreted as bearish. The Market Breadth

indicator (figure 3, bottom panel) is at its highest point sinceSeptember 1999. For the Nasdaq Index, the relative strength is very close tooversold territory and still declining (figure 2). The upper panelin Figure 4 shows that the number of stocks reaching new lowshas remained flat, while the number of stocks reaching newhighs has increased slightly. Declining stocks haveoutnumbered advancing ones at an increasing rate (lowest panel,figure 4). The momentum indicator has fluctuated betweenoversold and overbought, a potentially neutral indicator (figure4, middle panel).

VolatilityIndicators of market volatility are shown in figure 5.

The Chicago Board of Options Exchange (CBOE) providesdaily measures of volatility for the S&P 100 (VIX) and for theNasdaq 100 (VXN). Both volatility indicators declined sharplyafter September 21, when the indices were at their lowest pricelevels, and have continued a gradual decline since then.

Put/Call ratios appear in figure 6.

Monthly data are shown from January 1997 through March2002. The CBOE individual equity put/call ratio decreased inMarch, approaching levels usually interpreted as neutral. TheS&P 100 put/call ratio increased in March and now resides inbullish territory (figure 6).

Sector PerformanceFigure 7 compares the performance of the various economic sectors withinthe S&P 500 as well as other international and style indices.

Only three of the ten economic sectors in the S&P 500 havea positive year-to-date return as of April 26.Telecommunications has had the largest loss, -27.4 percent.Information technology, which had the largest return over thepast five years, had seen positive returns in the first few weeksof the year but is now down 20.2 percent for 2002. Thematerials and consumer staples sectors, which had the smallestreturn from 1997 through 2001, have experienced the largestgains so far this year (figure 7, top panel).

The Wilshire 5000, composed of all U.S. equity issues, haslost 4.7 percent year-to-date. Similarly, the German DAXdeclined 3.1 percent, and the British FTSE 100 is down 1.1percent. The Japanese Nikkei 225 has returned 9.5 percent ofits value as of April 26, 2002, after experiencing negativereturns five out of the last six years (figure 7, middle panel).

Over the last five years the Russell 1000 Large-Cap Indexreturned 15.0 percent, while the 2000 Small-Cap Index returnedon average 8.7 percent annually. Year-to-date, however, the1000 Large-Cap Index has depreciated 5.6 percent, while theRussell 2000 Small-Cap Index has appreciated 2.7 percent(figure 7, bottom panel). Growth stocks returned 15.2 percentin the years 1997 through 2001, but have declined 10.9 percentthis year. Value stocks have been flat in 2002, as measured bythe Russell 1000 Value Index.

ValuationFigure 8 displays historical and current price-earnings ratios for the S&P 500economic sector groups described above. Figure 9 graphs the current andprevious earnings forecasts for several calendar years in the top panel, andlists the current and previous growth of earnings forecasts for each S&P 500sector in the two tables. Figure 10 shows three measures of historical andfuture valuation: historical PE ratios in the top panel, forward and trailing PEratios using analysts' estimates of operating earnings in the middle panel, andstrategists’ two-year forecasts of earnings growth in the lower panel.

Among the economic sectors, price-earnings ratios generallyincreased since the fourth quarter of 2000. The ratio for thematerials sector has risen from 20.7 to 45.7 in that period. Theconsumer discretionary sector has also risen, from 17.9 to 65.1.The health care sector has seen a decline in its ratio from 42.2 inthe fourth quarter of 1998 to 31.1 as of April 26, due to both adecline in stock prices and an increase in earnings (figure 8).

The analysts surveyed by Thomson Financial/First Call projecta 9.0 percent decline in earnings for the S&P 500 in the firstquarter of 2002, but a 15.2 percent increase for the calendar year.Analysts have cut earnings expectations for the first quarter for tenof the eleven sectors, often sharply, since October's projection.The energy and transportation sectors are predicted to have thelargest percentage drop in earnings in the first quarter, and bothforecasts have been sharply cut since last fall. Consumer staplesare expected to see an increase of 14.9 percent in earnings thisquarter, but most sectors are not expected to see positive earningsgrowth until the second quarter of 2002 (figure 9).

The macro projections from strategists for the growth ofearnings for the Standard and Poor’s 500 index over the next twoyears have been revised downward to 6.9 percent in the firstquarter of 2002, below the 6.1 percent historical average annualgrowth rate. The S&P 500 trailing price-earnings ratio increasedto 45.2 in the fourth quarter of 2001 from 39.9 in the third quarter.During the first quarter of 2002, the price-earnings ratio for theRussell 2000 increased to 41.3 from 37.9. The second quarter

forecast for the S&P 500 forward price-to-operating-earningsratio, using bottom-up forecasts from analysts, increased to 21.5from 20.9 in the first quarter (figure 10).

Breadth of the S&P 500 The proportion of stocks in the S&P 500 that increased in 2001was 42.8 percent, down from 55.4 percent in 2000 and 80.3percent as recently as 1997 (figure 11, middle panel). Thedifference between the first and second deciles of stocks ranked byone-year price changes grew smaller from 2000 to 2001, while thegap between the worst performing decile and the one above itincreased (figure 11, top panel). The price to operating earningsratio for the top ten percent of the S&P 500 set an all-time high,sharply increasing the gap between the top two deciles. The otherdeciles all increased but the difference between each was almostthe same as it was in 2000 (figure 11, bottom panel).

Comparative Returns The dividend-price ratio, an indication of the yield investorsreceive through dividends by holding stocks, increased to 1.41percent in the fourth quarter from 1.38 percent in the third quarter.The earnings-price ratio fell to 2.2 percent in the fourth quarterfrom 2.5 percent in the third quarter. Both of these ratios are stillsubstantially below the 5.4 percent real rate of interest on corporatebonds and their respective historical averages, 3.01 percent and6.20 percent (figure 12). Typically, the earnings-price ratio fallsbelow the real return on bonds when analysts expect earnings torise rapidly.

Nonfinancial corporate businesses have tried to maintaindividends in the face of sagging profits, resulting in an unusuallyhigh dividend to operating profit payout rate of 68.3 percent, justbelow the highest ever recorded (figure 13, lower panel).

Moody's upgraded more investment grade securities in Marchthan February, while downgrading fewer speculative gradesecurities. Meanwhile, the number of downgrades of investmentgrade securities and upgrades of speculative grade securities wasminiscule (figure 15, top and middle panels). The default rate onjunk bonds has flattened at 16.9 percent in March (figure 15, lowerpanel).

The Stock Market Report is available online (internally)at http://fedweb.bos.frb.org/msmr/index.htm

Please contact Matthew S. Rutledge for questions and comments (617) 973-3198.

11/01/2000 02/16/2001 06/04/2001 09/21/2001 01/07/2002 04/23/2002400

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5000Nasdaq Composite Price Index(left scale)

daily volume(right scale)

NYSE Composite Price Index(left scale)

50-day moving average 1


*

*

* Nasdaq Composite Index peaked at 3451.58 on November 3, 2000.

* New York Stock Exchange Composite Index closed at 661.35 on November 3,2000.

Figure 1

Daily Trends of Major U.S. Stock Exchanges

New York Stock Exchange

Nasdaq Stock Market

millions of shares

index price

index price

millions of shares



daily volume(right scale)

Source: Bloomberg, L.P.

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Figure 2

Moving Averages and Relative Strength

New York Stock Exchangeindex price


10/01/2001 11/08/2001 12/19/2001 01/31/2002 03/13/2002 04/23/20020

20406080

100percent Relative Strength Index 3

Overbought

Oversold

Nasdaq CompositePrice Index



Nasdaq Stock Marketindex price

10/01/2001 11/08/2001 12/19/2001 01/31/2002 03/13/2002 04/23/20020

20406080

100percent Relative Strength Index 3

Overbought

Oversold

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Oversold

Momentum Oscillator 5

Cumulative Advances - Declines

NYSE Composite price

Figure 3

Index Breadth and Momentum Indicators - New York Stock Exchange

New Highs and New Lows 4

Market Breadth 6

number of stocks

index price

index price

number of stocks


10/01/2001 11/08/2001 12/19/2001 01/31/2002 03/13/2002 04/23/20021500

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NASDAQ New Highs(right scale)

NASDAQ New Lows(right scale)

10/01/2001 11/08/2001 12/19/2001 01/31/2002 03/13/2002 04/23/2002-1250

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Overbought

Oversold

Cumulative Advances - Declines(right scale)

NASDAQ Composite Price Index(left scale)

Figure 4

Index Breadth and Momentum Indicators - Nasdaq Stock Market

NASDAQComposite Price Index(left scale)

New Highs and New Lows 4

Momentum Oscillator 5

Market Breadth 6

index price

index price

number of stocks

number of stocks


05/01/2001 07/11/2001 09/25/2001 12/04/2001 02/14/2002 04/26/2002-40

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S&P100 Price Index(left scale)

VIX(right scale)

Figure 5

Volatility 7

05/01/2001 07/11/2001 09/25/2001 12/04/2001 02/14/2002 04/26/20021000

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90Nasdaq 100 Price Index (left scale) VXN

(right scale)

S&P100 and CBOE's OEX Volatility Index 8

Nasdaq 100 and CBOE's NDX Volatility Index 9

S&P500 Index Return and Implied Volatility

1-year average Returns(left scale)

Implied Volatility(right scale)

percent

index price

index price


Jan:1997 Jan:1998 Jan:1999 Jan:2000 Jan:2001 Jan:2002700

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Figure 6

Put / Call Ratio


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Ratio for Individual Equity Options(right scale)

CBOE Index and Individual Equity Put/Call Ratios 10

Ratio(right scale)

S&P 100 Price Index and Put/Call Ratio

Index Price(left scale)


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Ratio(right scale)

Nasdaq 100 Price Index and Put/Call Ratio

Index Price(left scale)

S&P 500 Price Index(left scale)

ratio

ratio

ratio

index price

index price

index price

Source: Haver Analytics

Excessive Put Buying = High Put/Call Ratio = Overly Pessimistic = Bullish Sign

Excessive Call Buying = Low Put/Call Ratio = Overly Optimistic = Bearish Sign

Figure 7

S&P 500 Economic Sectors - Index Returns

23.419.0

15.414.0

10.410.17.4

7.06.8

0.9-5 0 5 10 15 20 25

Year-to-Date Performance of S&P 500 Economic Sectors

Utilities

Materials

Telecommunications

Consumer Discretionary

Info Technology

Consumer Staples

Industrials

Energy

Health Care

Financials

percent

-10.9-5.6

-0.22.7

-15 -10 -5 0 5

Year-to-Date Performance of Selected Russell Style Indexes

2000 Small-Cap

1000 Value

1000 Large-Cap

percent

-20.16

-5.72

-1.14

-0.36

-11.18

-27.4

2.82

-0.84

9.96

4.87

-30 -20 -10 0 10 200

5-Year Annualized Performance of S&P 500 Economic Sectors

percent

1000 Growth15.215.0

14.58.7

-5 0 5 10 15 20

5-Year Annualized Performance of Selected Russell Style Indexes

percent

Year-to-Date Performance of Selected Geographical Indexes

5-Year Annualized Performance of Selected Geographical Indexes

-3.1-4.7

-1.19.5

-10 -5 0 5 10 15

Nikkei 225, Japan

FTSE 100, U.K.

Wilshire 5000

percentDAX, Germany15.32

9.806.14

-8.88-10 -5 0 5 10 15 200

percent


SP500

Consu

mer D

isc.

Consumer S

taple

Energ

y

Financia

ls

Health

Car

e

Industr

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Info

Tech

Mate

rials

Teleco

mm

s

Utiliti

es0

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40

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80Q4 96 Q4 98 Q4 00 Current

Figure 8

S&P 500 Economic Sectors - Earnings Growth

PE Ratios for S&P 500 Economic Sectors

SP500

Finan

cial

Utility

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ortati

on

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Materia

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l Goo

ds

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icatio

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Health

Care

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y-40-20

020406080

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0

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SP500

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Utility

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ateria

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oods

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yclic

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taple

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Health

Car

e

Technology

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0

5-YEAR 3-YEAR 1-YEAR

Earnings Growth for S&P 500 Economic Sectors(annualized percent change)

Operating Earnings Growth for S&P 500 Economic Sectors(annualized percent change)

Source: Standard & Poor's Compustat Special Projects, Bloomberg, L.P.

N/A N/A

06/26/1998 12/25/1998 06/25/1999 12/31/1999 06/30/2000 12/29/2000 06/29/2001 12/28/2001 04/26/2002-20

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Calendar Year 1999

Calendar Year 2000

Calendar Year 2001

Calendar Year 2002

Sector Current Mar02Q

Jan-02 Mar02Q

Oct-01 Mar02Q

Current Jun02Q

Jan-02 Jun02Q

Oct-01 Jun02Q

Current Sep02Q

CurrentDec02Q

Current Mar03Q

Basic Materials -11.1% -4.1% 21.6% 13.3% 5.4% 23.2% 53.1% 172.3% 114.0%

Capital Goods -4.5% 1.0% 2.1% 6.4% 10.1% 8.0% 21.9% 25.2% 14.8%

Communications -1.5% 4.2% 17.0% -5.6% 5.7% 14.5% -0.3% 45.5% 22.1%

Consumer Cyclicals

0.5% -4.5% 14.8% 33.7% 16.2% 35.8% 27.8% 42.8% 28.0%

Consumer Staples

14.9% 8.3% 12.4% 17.3% 11.6% 13.2% 23.3% 26.2% 15.4%

Energy -62.1% -44.8% -27.8% -42.1% -34.2% -19.5% -14.6% 54.5% 90.1%

Financials 6.1% 8.7% 9.9% 22.3% 23.1% 26.2% 47.4% 42.8% 14.4%

Health Care 9.5% 11.0% 14.4% 6.2% 10.8% 14.3% 10.6% 15.4% 13.6%

Technology -24.7% -33.3% -6.6% 34.0% 33.3% 70.2% 136.3% 73.5% 72.5%

Transports -261.8% -169.5% 586.8% -40.9% 10.1% 236.4% nm nm 41.0%

Utilities -11.6% 3.0% 6.7% -0.2% 6.7% 11.2% 9.8% 24.2% 22.4%

Total -9.0% -6.2% 3.5% 7.7% 8.8% 18.4% 28.0% 41.5% 28.3%

Total ex. Tech -7.3% -3.1% 4.7% 5.9% 6.9% 14.3% 22.6% 38.4% 23.8%

Total ex. Energy -0.5% 0.4% 8.1% 15.3% 15.9% 23.8% 33.0% 40.6% 24.2%

Sector Current 02CY

Apr-02 02CY

Jan-02 02CY

Oct-01 02CY

Jul-01 02CY

Current 03CY

Apr-02 03CY

Basic Materials 45.5% 44.5% 43.1% 70.9% 64.9% 66.8% 68.6%

Capital Goods 12.1% 12.8% 12.2% 14.0% 17.2% 13.6% 13.4%

Communications 3.9% 11.0% 11.8% 22.4% 22.5% 11.8% 11.7%

Consumer Cyclicals 28.7% 24.5% 19.9% 21.3% 24.5% 21.0% 23.1%

Consumer Staples 19.3% 23.1% 14.7% 14.8% 17.5% 15.4% 15.5%

Energy -31.3% -32.8% -25.4% -16.4% -11.2% 22.1% 24.8%

Financials 28.6% 28.7% 26.8% 20.5% 16.5% 14.2% 14.2%

Health Care 10.2% 13.4% 12.7% 15.9% 15.6% 15.8% 14.6%

Technology 37.6% 41.3% 46.4% 59.8% 55.0% 48.0% 58.0%

Transports nm nm nm 166.0% 69.1% 190.9% 152.2%

Utilities 2.5% 2.9% 9.0% 13.4% 11.3% 9.0% 9.1%

Total 15.2% 16.5% 16.1% 18.6% 19.2% 20.2% 20.7%

Total ex. Tech 13.4% 14.4% 13.7% 15.1% 15.5% 17.4% 17.6%

Total ex. Energy 21.0% 22.7% 21.4% 23.3% 23.1% 20.0% 20.4%

Growth of Earnings - Quarterly Pattern

Growth of Earnings - Calendar Year

Figure 9S&P 500 Economic Sectors - Earnings Forecast

Source: Thomson Financial/First Call

S&P 500 Operating Earnings

(4-quarter percent change)

(4-quarter percent change)

(Year-over year percent change)

Calendar Year 2003

percent

Price-Earnings Ratios

S&P500 Price-Earnings Ratio and the Growth of Earnings

S&P500 Price-Operating Earnings Ratio

Source: Thomson Financial/First Call, DRI, Bloomberg L.P., Frank

Figure 10

PE Ratios and the Growth of Earnings

1968:Q1 1972:Q2 1976:Q3 1980:Q4 1985:Q1 1989:Q2 1993:Q3 1997:Q4 2002:Q10

10

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60

S&P 500

S&P Smallcap 600

Russell 2000

Wilshire 5000

4-qtr Trailing Earnings

4-qtr Forward Earnings

Price-Earnings Ratio (left scale)

2 yr Growth of Earnings 11(right scale)

1967 1972 1977 1982 1987 1992 19970

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14.4

One-Year Price Changes for Companies(median percentage change for each decile, ranked by performance)

Price-Operating Earnings Ratios for Companies(median ratio for each decile, ranked by PE ratio)

PE=14.4

Figure 11

Breadth of the S&P 500

1968 1973 1978 1983 1988 1993 1998-100

-50

0

50

100

150

0

Proportion of the S&P 500 Stocks Whose Price Increased Over One Year

1968 1973 1978 1983 1988 1993 19980

102030405060708090

100

50

percent

Source: Standard & Poor's Compustat Special Projects

2001

2001

2001

Figure 12

Comparative Returns

1982:Q1 1986:Q1 1990:Q1 1994:Q1 1998:Q1 2002:Q10123456789

1011

Yield on A-Corporate Bonds Less Inflation Expectations

Earnings-Price Ratio 12 for the S&P 500 and the Real Corporate Bond Rate

Growth of Real Earnings for S&P 500(average rate of growth for 2 years forward)

1982:Q1 1986:Q1 1990:Q1 1994:Q1 1998:Q1 2002:Q10

2

4

6

8

10

12

14

Yield on A-Corporate Bonds Less Inflation Expectations

Dividend-Price Ratio 12 for the S&P 500 and the Real Corporate Bond Rate 13

1982:Q1 1986:Q1 1990:Q1 1994:Q1 1998:Q1 2002:Q1-50-40-30-20-10

0102030405060

0

percent

Source: Haver Analytics, FAME

Figure 13

Dividend Yields

1960:Q1 1967:Q1 1974:Q1 1981:Q1 1988:Q1 1995:Q1 2002:Q10

2

4

6

8

10

12

Composite

Industrials

Dividend Yields for S&P 500 and Components

Utilities

Financials

Transports

1960:Q1 1967:Q1 1974:Q1 1981:Q1 1988:Q1 1995:Q1 2002:Q110

20

30

40

50

60

70

80

90

2.5

3

3.5

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5

5.5

6

Nonfinancial Corporate Dividends(percent of profits, left scale)

Nonfinancial Corporate Dividend Expenditures and Personal Dividend Income

Personal Dividend Income(percent of disposable income, right scale)

percent

percent percent

Source: Haver Analytics

Real Rate of Return on Nonfinancial Corporate Equity(from National Income and Flow of Funds Accounts)

1958 1964 1970 1976 1982 1988 1994 20004

5

6

7

8

9

10

11

12percent

1958:Q1 1966:Q4 1975:Q3 1984:Q2 1993:Q1 2001:Q43

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8

9

10

11

12

Profits of Nonfinancial Corporations(percent of GDP)

Tobin's q 14

Earnings Before Interest Payments

Figure 14Economic Measures of Equity Valuation

1952:Q1 1959:Q2 1966:Q3 1973:Q4 1981:Q1 1988:Q2 1995:Q30

0.5

1

1.5

2

Source: Haver Analytics, NYSE Fact Book, Flow of Funds Accounts

2001:Q4

Figure 15

Ratings and Default Rates

Source: Credqual database, Board of Governors of the Federal Reserve System

JUL98 NOV98 MAR99 JUL99 NOV99 MAR00 JUL00 NOV00 MAR01 JUL01 NOV01 MAR020

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Upgrades(left scale)

SP500 PE Ratio(right scale)

Changes in Moody's Ratings of Investment Grade Securities 15

and the S&P 500 PE Ratio

Downgrades(left scale)

dollars


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Moody's Junk Bond Default Rateand the S&P 500 PE Ratio

Default Rate(left scale)

percent


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70

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45

50

Upgrades(left scale)


Changes in Moody's Ratings of Speculative Grade Securities 15

and the S&P 500 PE Ratio

Downgrades(left scale)

dollars

(145.9) (107.9)

Figure 16

Margin Debt and Expected Returns

Source: Haver Analytics, FAME

1987:Q1 1989:Q3 1992:Q1 1994:Q3 1997:Q1 1999:Q30

10

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Outstanding Margin Debt Relative to Total Market Value of Equities (right scale)

Gross New Issuance of Securities by Nonfinancial Corporations

1987:Q1 1990:Q1 1993:Q1 1996:Q1 1999:Q10

50

100

Bonds

$ billions

Equity

1987:Q1 1989:Q3 1992:Q1 1994:Q3 1997:Q1 1999:Q30

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0.7ratio Gross New Issuance and the S&P 500 PE Ratio

New Equity Security Issuance Relative to Total Market Value (right scale)

VIX(left scale)

PE Ratio(left scale)

2001:Q4

2001:Q4

2001:Q4

Outstandings

1985:Q1 1987:Q3 1990:Q1 1992:Q3 1995:Q1 1997:Q3 2000:Q10

500

1000

1500

2000

2500

US Resident Holdings of Foreign Securities

Foreign Holdings of US Securities

$ billions

Foreign Holdings of U.S. Equity Securities Relative to Total Market Value of U.S. Equity

1985:Q1 1987:Q3 1990:Q1 1992:Q3 1995:Q1 1997:Q3 2000:Q14

5

6

7

8

9

10

11

12

0

500

1000

1500

2000

S&P 500(right scale)

Foreign Holdings of U.S. Securities

percent

0

2

4

6

8

10

12

60

80

100

120

140

160

180

200

U.S. Resident Holdings of Foreign Securities(left scale)

DJ World Stock Index,Excluding U.S.(right scale)

percent

Figure 17

Foreign and Domestic Holdings

indexprice

indexprice

U.S. Resident Holdings of Foreign Equity Securities Relative to Total Market Value of U.S. Equity

Source: Haver Analytics, FAME, Flow of Funds Accounts of the United States

2001:Q4

2001:Q4

2001:Q4

1985 1989 1993 1997 20010

20

40

60

80

100

NYSE's and Nasdaq's share of the Total Market

(by market value)

1980:Q1 1984:Q3 1989:Q1 1993:Q3 1998:Q10

20

40

60

80

100

Other

Households

State & Private Pension

InsuranceTrusts

Distribution of Equity Ownership by Sector

percent

percent

Total 2 4 6 8 10

-10

0

10

20

30

40

50

60

0

Equity Bond Short-Term

Households' Equity Ownershipby Net Worth Decile

(percent of net worth)

NYSE

NASDAQ

percent

Source: Haver Analytics, Survey of Consumer Finance, Flow of Funds Accounts

Figure 18Demographics

Capital Gains Relative to Personal Income

1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 19981

2

3

4

5

6

7

8

9

10

Total Capital Gains

percent

Total Long-Term Capital Gains

2001:Q4

Endnotes1. 50-Day, 200-Day Moving Average: Moving averages represent the average price

investors paid for securities over a historical period, and present a smoothedpicture of the price trends, eliminating the volatile daily movement. Because theselines offer a historical consensus entry point, chartists look to moving averagetrend lines of index prices to define levels of support or resistance in the market.When a chart trend is predominantly sideways (Figure 1, top chart), movingaverages and the underlying series frequently cross, but during a time ofprolonged increase or decrease (bottom chart) the daily prices of a securitytypically are above or below the trailing average. Moving above or below the 50-day moving average is sometimes associated with rallies or corrections. Similarly,prolonged movements, such as bull and bear markets can be represented bysecurities remaining above or below their 200-day moving average for prolongedperiods of time.

2. 9-Day, 18-Day Moving Averages: The 9-day and 18-day moving averages areoften used together to provide buy and sell signals. Buy signals are indicated bythe 9-day average crossing above the 18-day when both are in an uptrend. Thereverse, the 9-day crossing below the 18-day while both moving averages aredeclining is a sign to sell. However, this simple can often be misleading becauseof its dependence on trending markets and inability to capture quick market turns.

3. Relative Strength Index: This (RSI) momentum oscillator measures the velocityof directional price movements. When prices move rapidly upward they mayindicate an overbought condition, generally assumed to occur above 70 percent.Oversold conditions arise when prices drop quickly producing RSI readingsbelow 30 percent.

4. New Highs, New Lows: A straightforward breadth indicator, this is the 10-daymoving average of the number of stocks on a given index or exchange makingnew 52-week highs or lows each day. This indicator also demonstratesdivergence. If an index makes a new low, but the number of stocks in the indexmaking new lows declines, there is positive divergence, and in this case a lack ofdownside conviction. Conversely, In rising markets if an index makes a new highbut the number of individual stocks in that index making new highs does notincrease this suggests a false rally.

5. Overbought / Oversold Oscillator: This momentum indicator is calculated by takingthe 10-day moving average of the difference between the number of advancingand declining issues for a given index. The goal of the indicator is to showwhether an index is gaining or losing momentum, so the size of the moves aremore important than the level of the current reading. This is first affected by howthe oscillator changes each day, by dropping a value ten days ago, and adding onetoday. If the advance decline line read minus 300 ten days ago, and minus 100today, even though the market is down again, the oscillator will rise by 200because of the net difference of the exchanged days' values. This suggests a

trough, however, if today's reading was minus 500 it would demonstrate a gain indownside momentum.

The magnitude in moves is useful when compared with divergence to theindex price. If the Dow peaks at the same time the oscillator peaks in overboughtterritory, it suggests a top. If the index then makes a new high but the oscillatorfails to make a higher high, divergence is negative and momentum is declining. Ifthe index at this point declines and the oscillator moves into oversold territory itmay again be time to buy. If the index rises but does not make new highs, but theoscillator continues to rise above a previous overbought level, upside momentumexists to continue the rally.

6. Cumulative Advance / Decline Line: Referred to as market breadth, the indicator isthe cumulative total of advancing minus declining issues each day. When the linemakes new highs a rally is considered widespread, but when lagging a rally isseen as narrow.

7. Volatility: With regard to stock prices and stock index levels, volatility is a measure ofchanges in price expressed in percentage terms without regard to direction. Thismeans that a rise from 200 to 202 in one index is equal in volatility terms to a risefrom 100 to 101 in another index, because both changes are 1 percent. Also, a 1percent price rise is equal in volatility terms to a 1 percent price decline. Whilevolatility simply means movement, there are four ways to describe thismovement:

1. Historic volatility is a measure of actual price changes during a specific time period in the past. Mathematically, historic volatility is the annualized standard deviation of daily returns during a specific period. CBOE provides 30 day historical volatility data for obtainable stocks in the Trader's Tools section of this Web site.2. Future volatility means the annualized standard deviation of daily returns during some future period, typically between now and an option expiration. And it is future volatility that option pricing formulas need as an input in order to calculate the theoretical value of an option. Unfortunately, future volatility is only known when it has become historic volatility. Consequently, the volatility numbers used in option pricing formulas are only estimates of future volatility. This might be a shock to those who place their faith in theoretical values, because it raises a question about those values. Theoretical values are

only estimates, and as with any estimate, they must be interpreted carefully.3. Expected volatility is a trader's forecast of volatility used in an option pricing

formula to estimate the theoretical value of an option. Many option traders study market conditions and historical price action to forecast volatility. Since forecasts vary, there is no specific number that everyone can agree on for expected volatility.

4. Implied volatility is the volatility percentage that explains the current market price of an option; it is the common denominator of option prices. Just as p/e ratios allow comparisons of stock prices over a range of variables such as total

earnings and number of shares outstanding, implied volatility enables comparison of options on different underlying instruments and comparison of the same option at different times. Theoretical value of an option is a statistical concept, and traders should focus on relative value, not absolute value. The terms "overvalued" and "undervalued" describe a relationship between implied

volatility and expected volatility. Two traders could differ in their opinion of the relative value of the same option if they have different market forecasts and trading styles.

8. CBOE Volatility Index (VIX): The VIX, introduced by CBOE in 1993, measures theVolatility of the U.S. equity market. It provides investors with up-to-the-minutemarket estimates of expected volatility by using real-time OEX index optionbid/ask quotes. This index is calculated by taking a weighted average of theimplied volatilities of eight OEX calls and puts. The chosen options have anaverage time to maturity of 30 days. Consequently, the VIX is intended toindicate the implied volatility of 30-day index options. It is used by sometraders as a general indication of index option implied volatility. (Source: CBOE)

9. CBOE NASDAQ Volatility Index (VXN): Like the VIX, the VXN measures impliedvolatility, but in this case for NASDAQ 100 (NDX) index options, therebyrepresenting an intraday implied volatility of a hypothetical at-the-money NDXoption with thirty calendar days to expiration. Both the VXN and the VIX areused as sentiment indicators for the NASDAQ 100 and for the broader market,respectively. Higher readings and spikes generally occur during times of investorpanic and at times coincide with market bottoms. Low readings suggestcomplacency and often occur around tops in index prices.

10. Put / Call Ratio: These ratios are used as contrary sentiment indicators. Higher ratiovalues, indicating more put trading, is considered more bullish. The CBOE indexratio tracks trade volume of all exchange traded index options, reflectingsentiment of professional and institutional strategies. The CBOE equity ratio iscomposed of trade volume for individual equity options and a better indicator ofretail investor sentiment. Equity ratio readings 60/100 and 30/100 denote levelsof bullishness and bearishness. Similarly, bullish and bearish boundaries for theS&P 100 are 125/100 and 75/100.

11. 2-Year Growth of Earnings: Growth of earnings over subsequent 8 quarters. Currentobservations use forecast of earnings from macro projections.

12. Earnings and Dividend Price Ratios: These ratios represent an investor's yield fromearnings and dividend payments. Historically, the EP ratio often has exceeded thereal return on bonds, reflecting the greater risk to shareholders for choosing equityinvestments. Recently, the EP ratio has fallen below the return on bonds asinvestors demand uncharacteristically large capital gains to compensate for thelow earnings yield. Historically, the EP ratio has fallen below the real bond rateonly when earnings are expected to rise dramatically.

13. Real Bond Rate: Moody's composite yield of A-rated corporate bonds less theexpected rate of inflation over the next 10 years as measured by the consumerprice index from the Survey of Professional Forecasters, published by the FederalReserve Bank of Philadelphia.

14. Moody's Ratings: Denotes the change in dollar amount of investment grade (aboveBA1) or speculative grade (BA1 or below) securities outstanding for a particularcompany if that company is up/downgraded during a given month. For example,if company XYZ was upgraded, and they had bonds rated AA2 for $10, AA1 for$2, and A3 for $15, this company's contribution to the chart value is $27.

15. Investor Expectations: Internally generated composite of the Conference Board's12-month forward investor expectations for no change, increase, and decrease inthe stock market. Composite values of 50 indicate neutral expectations. Valuesbelow 50 demonstrate bearish sentiment, though the chart demonstrates that theoutlook of investors is typically bullish.

16. Tobin's q: The ratio of the market value of equity plus net interest bearing debt tocurrent value of land, inventories, equipment, and structures.

Stock Market Report- May 1, 2002

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