Farrell: So What Is The Market Worth?

April was such a great month, with major averages up strongly and a bunch of economic statistics that show the downturn in the economy is easing. Two-thirds of the 42 major stock markets the Economist Magazine tracks were up more than 20% in the last six weeks. Fueling this movement is a massive ocean of liquidity poised on the sidelines. Money market funds have about $4 trillion and various types of savings accounts have another $7 trillion. Any slight move by this money could keep the rally going. I feel this money will tire of earning almost nothing, but the fixed income market (not the stock market) will be the first beneficiary.

I have been of the mind for some time that we are in a bottoming process.

History shows us that such a process takes about a year and has multiple downside probes. I think we are towards the end of that process, but not quite done yet. The November level of 750 or so on the S&P was the first probe down and was followed by an "undercut" to the 666 intraday low hit in early March. I am hoping that the next test will stop well short of these targets.

The median estimate for S&P earnings for this year is about $50, as near as I can tell. I like to use numbers that have a zero in them since it makes multiplication so much easier. When inflation has been less than 2%, the market has averaged a price-to-earnings multiple of 18.4 times. That would give a value of 920 for the S&P (18.4 times $50). But most feel that if the Fed's programs to jump-start the economy were to be successful, the threat, if not the actuality, of inflation would rear its head. The median multiple for all bear-market bottoms going back to 1929 is 13.9 times, and perhaps we should use that to acknowledge the inflation risk. 13.9 times $50 gives a target of 695. Average the two together and you get a target of 807. The 100-day moving average is at 830. Also, a one-third to one-half correction of sharp advances is more the norm than the exception. The early-March intraday low was 666, and the 900 level is a huge move in a short period of time. A one-third correction of that move would put you a bit below 800. I want to be wrong on this and have the market go up forever. But climbing a steep wall on the back of "the news isn't as bad as feared" leaves me with some doubts.

On the other hand (Harry Truman always wanted a one-armed economist so you couldn't dodge to the "other hand"), the strength in financial stocks does appear to be a bit more than just short-covering. During the trading day, the Associated Press said Wells Fargoneeded to raise capital, and the stock blew through the news and flirted with a gain of 20%. The New York Times had an article that said banks were better capitalized than originally thought, and the market seems to be saying that any capital raise can be handled. That sort of action is very encouraging, but I'll stay with the "original hand" and look for a normal correction of this wonderful sharp rally in the next few weeks.

Special Coverage on CNBC.com: