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Farrell: Go To The Beach

Go to the beach early! If we can survive Kris upsetting Adam on American Idolwhile it looks like the UK will have its debt downgraded, we can cut-out early one time! The market will try to stay awake long enough Friday to get to the 4 PM close, but I don't expect much, if anything, to happen.

We have to be encouraged by the market's ability to not go into a tailspin when the word came about the UK debt issues and Bill Gross said the US could face the same situationbefore too long. I guess there have been enough "green shoots" to encourage people to tilt towards the optimistic side on the ledger. But less bad news isn't the same as actual good news, and while I think we have seen the bottom for this bear market, I do expect the market to have a bit of a correction.

Most steep advances, especially light volume ones, will see a 1/3rd to 1/2 set-back of the advance. That would bring us back to a range of 798 to 842. Since the 100-day moving average and the 50-day are crowding around the 830 level, I am hoping that will be the target for the S&P average (we are at roughly 885 now). If you were to rely on my technical skills to guide your trading activity, your career would be short and painful, but, nevertheless, that's my best guess.

From a fundamental tack, I see there are wide disparities between very smart guys on what earnings will be this year. I think the median is around $50. When inflation has been under 2% (like now), the average multiple has been 18.4 times. A derived value using those numbers would be 920 for the S&P average. But many fear a return of inflation before too long due to the Fed's efforts to pump liquidity into the system. So an 18.4 price-to-earnings multiple might be too optimistic. Use 14 times -- which has been the median multiple for bear market troughs since 1929 (my source is Barron's Magazine) -- and you get a derived value of a bit under 700. There is no reason to average the two together, but there is no reason not to, so the average target is in the lower 800's. That's not too different from the typical 1/3 to 1/2 correction-of-steep-advances level we figured above.

At the end of the day, I'm trying to guess a short-term target for the market. I am optimistic about the longer term, but reasonably so. I think that, with a delevered financial system and a consumer that has been traumatized back into a savings mode, the likely earnings gains for corporate America will be muted over the next few years. But that leads to the question of what the gains might be, which is a nice debate to have over a long weekend compared to what we were worried about just a short while ago.

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