'This is not healthy': The latest advance for stocks could signal more pain ahead for markets. Here's why

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As tempting as it might be to call a bottom in stocks, Nicholas Colas, co-founder of DataTrek Research, said Tuesday that investors should brace for more...

U.S. stocks kicked off the fourth quarter with sharp gains as the Dow Jones Industrial Average DJIAappears headed for its biggest two-day rally in more than 2½ years.But as tempting as it might be to call a bottom in stocks, Nicholas Colas, co-founder of DataTrek Research, said Tuesday... U.S. stocks kicked off the fourth quarter with sharp gains as the Dow Jones Industrial Average DJIA appears headed for its biggest two-day rally in more than 2½ years.

The one exception to this was 2020, when the S&P 500 registered 19 daily gains of 2% or more. However, Colas argued that most of these outsize moves occurred during the first half of the year, when markets were still reeling from the onset of the COVID-19 pandemic. According to the Shiller PE ratio, the long-run mean valuation for stocks dating back to the 1870s is between 16 times and 17 times cyclically-adjusted earnings. As of Friday, the S&P 500 — which was created in 1957 — was trading at 27.5 times earnings, and after Monday’s rally, it was trading at 28.2 times, Colas said.

During the dot-com blowup, the VIX “experienced a series of rolling spikes that ground away at market confidence and valuations.” Ultimately, it took 2½ years for stocks to bottom out after prices peaked in March 2000. U.S. stocks are headed for back-to-back gains on Tuesday, with the S&P 500 SPX up 2.9% to 3,784, the Dow Jones Industrial Average DJIA up 2.6% at 30,258 and the Nasdaq Composite COMP up 3.3% to 11,174.

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