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									Stock
Market
Report
Federal Reserve Bank of Boston




                                 federal reserve
                                 bank of bostonTM
January 24, 2007


Stock Market Report
                      Market Analysis for Period Ending Friday, January 19, 2007

                   This document presents technical and fundamental analysis commonly used by investment
                   professionals to interpret direction and valuation of equity markets, as well as tools
                   commonly used by economists to determine the health of financial markets and their
                   impact on the domestic United States economy. The purpose is to provide a synopsis of
                   equity markets from as many disciplines as possible, but is in no way an endorsement of
                   any one mode of study or source of advice on which one should base investment
                   decisions.
                   Definitions of terms and explanations of indicator interpretation follow the charts in the
                   Endnotes section.

                   Technical Trends
                   Figure 1 presents price trends and daily volumes for the New York Stock Exchange and
                   NASDAQ Composite Indices.

                      The New York Stock Exchange Composite Index (NYSE Index)
                   closed Friday, January 19 at an all time high of 9179.53, with a return of
                   18.4 percent since the beginning of 2006. The index has risen 0.4
                   percent since the beginning of 2007.
                      The National Association of Securities Dealers Composite Index
                   (NASDAQ Index) closed Friday, January 19 at 2451.31, with a gain of
                   11.2 percent since the beginning of 2006. The index has risen 1.5
                   percent so far this year, and has dropped 2.1 percent since its recent high
                   of 2502.82 reached on November 22 (Figure 1).

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

                      On January 19, the relative strength index for the NYSE Composite
                   Index had a value of 62.1 percent, in neutral territory (figure 2, upper
                   panel). The number of NYSE stocks making new 52-week highs ended
                   January 19 at 153, down from the average of 206 seen during the fourth
                   quarter of 2006. The number of NYSE stocks making new 52-week
                   lows ended January 19 at 13, in line with the average of 11 seen over
                   the past three months (figure 3, upper panel). The middle panel shows
                   the momentum indicator (overbought/oversold oscillator) continued to
                   spend most of its time in overbought territory over the past several
                   weeks. The gap between NYSE's Market Breadth indicator and Price
                   Index has remained relatively constant (figure 3, bottom panel).
                      The relative strength index for the NASDAQ Index had a value of
                   51.5 percent on January 19, in neutral territory (figure 2). The number
of NASDAQ stocks hitting new highs on January 19 was 91, down from
its fourth quarter average of 111. The number of new lows was 36 on
January 19, in line with its average seen over the past three months
(figure 4, upper panel). The middle panel shows the momentum
indicator stayed in overbought territory over the past several weeks
(figure 4, middle panel). The gap between NASDAQ's Market Breadth
indicator and Price Index has widened somewhat over the past several
weeks (lowest panel, figure 4).

Volatility
Indicators of market volatility are shown in figure 5.

  The Chicago Board of Options Exchange (CBOE) provides daily
measures of volatility for the S&P 100 (VIX) and for the NASDAQ 100
(VXN). Both indices point to decreased volatility, compared to
movements seen last summer.

Put/Call ratios appear in figure 6. Monthly data are shown from January 1997.

    The CBOE individual equity put/call ratio held steady at 0.59 in
December, at the upper end of neutral territory. The S&P 100 put/call
ratio rose slightly in December to 1.41, from November's ratio of 1.38.

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

   As of January 19, seven of the ten S&P 500 economic sectors
recorded positive returns year-to-date. The health care sector posted the
highest gain at 3.5 percent, followed by consumer discretionary with a
gain of 3.3 percent. The energy sector posted the largest drop, at
negative 4 percent (figure 7, top panel).

   All four geographic indices recorded positive returns year-to-date.
The Wilshire 5000 posted the largest gain, rising 2.3 percent, following
by Germany's DAX at 0.9 percent. Japan's Nikkei 225 rose 0.5 percent,
and the U.K.'s FTSE 100 rose 0.3 percent (figure 7, middle panel).

   Three of the four Russell Style Indices recorded increases year-to-
date. Leading the way was the Russell 1000 Growth Index, with a gain
of 2.1 percent, followed by the Russell Large-Cap Index, with a gain of
1.1 percent. The Russell 1000 Value Index rose 0.2 percent, while the
Russell 2000 Small-Cap Index fell 0.3 percent (figure 7, bottom panel).

Valuation
Figure 8 displays historical and current price-earnings ratios for the S&P 500
economic sector groups described above in the top panel, and analyzes earnings
growth in 5-year, 3-year, and 1-year increments for each sector in the bottom two
panels. Figure 9 shows two measures of historical and future valuation: historical PE
ratios in the top panel and strategists’ two-year forecasts of earnings growth in the
lower panel.

    The price-earnings ratios so far in 2006 continue to resemble last years’
observations for most S&P 500 economic sectors. On January 19, the PE
ratio for the energy sector was the lowest at 9.8. The consumer cyclical
and information technology sectors had the highest PE ratios of 30.1 and
24.6, respectively (figure 8, top panel).

   The macro projections from strategists for the growth of earnings for
the Standard and Poor’s 500 index over the next two years rose to 6.4
percent in the fourth quarter of 2006, from a revised 4.7 percent in the third
quarter (Figure 9).

Breadth of the S&P 500
   During the fourth quarter of 2006, median price changes on a year-over-
year basis were positive for eight of the ten deciles (figure 10, top).
Overall, 74.8 percent of stocks in the S&P 500 had price increases from a
year ago (figure 10, middle panel). During the third quarter, the median
price earnings ratio was above the historical average price earnings ratio of
14.4 for six deciles (figure 10, bottom).

Comparative Returns
    The dividend-price ratio, an indication of the yield investors receive
through dividends by holding stocks, was 1.8 during the fourth quarter of
2006, down slightly from its third quarter rate of 1.9. The earnings-price
ratio was 6.1 in the third quarter of 2006, following a rate of 5.8 in the
second quarter (figure 11).

   The dividends percent of profit for nonfinancial corporations dipped to
43.2 percent in the third quarter, from 45.2 percent in the second quarter.
The personal dividend payout rate was 6.7 percent in the third quarter, in
line with its growth during the second quarter (figure 12, lower panel).

   Moody's upgraded a higher dollar amount of Investment Grade
Securities in October, compared to the dollar amount downgraded.
However, the opposite was true for Speculative Grade Securities (figure
14, top and middle panels). The default rate on junk bonds fell to 1.7
percent in October, down from 1.8 percent in September (figure 14, lower
panel).

The Stock Market Report is now available to the general public. The current issue, as well
as previous editions, can be found at our public website,
http://www.bos.frb.org/economic/smr/smr.htm.
Please contact Delia Sawhney for questions and comments at
Delia.R.Sawhney@bos.frb.org, or by phone at (617) 973-3542.
Figure 1
Daily Trends of Major U.S. Stock Exchanges

 New York Stock Exchange
 index price                                                                              millions of shares

 9500                                                                                                4000
                NYSE Composite
                Price Index                                                                          3500
 9000                                                                 daily volume
                (left scale) 50-day moving average 1
                                                                      (right scale)                  3000
                                200-day moving average 1
 8500
                                                                                                     2500


 8000                                                                                                2000


                                                                                                     1500
 7500

                                                                                                     1000

 7000
                                                                                                     500


 6500                                                                                              0
   07/15/05                   11/01/05         02/22/06    06/12/06            09/28/06      01/19/07




 Nasdaq Stock Market
 index price                                                                              millions of shares

 2600                                                                                                4000
               Nasdaq Composite Price Index
 2500
               (left scale) 50-day moving average 1                                                  3500
                           200-day moving average 1                     daily volume
                                                                        (right scale)                3000
 2400

                                                                                                     2500
 2300
                                                                                                     2000
 2200
                                                                                                     1500

 2100
                                                                                                     1000

 2000                                                                                                500


 1900                                                                                              0
   07/15/05                   11/01/05         02/22/06    06/12/06            09/28/06      01/19/07


    Source: Bloomberg, L.P.
Figure 2
Moving Averages and Relative Strength
   New York Stock Exchange
  index price
  9500
                               NYSE Composite
                               Price Index              9-day moving average 2
  9000



  8500



  8000
                                                                          18-day moving average 2


  7500
   Relative Strength Index 3
   percent
   100
                                                   Overbought
     80
     60
     40
     20
                                                  Oversold
       0
    07/21/06                    09/05/06           10/18/06                 12/01/06                01/19/07

   Nasdaq Stock Market
  index price
  2600

  2500                                          9-day moving average 2

  2400          Nasdaq Composite
                Price Index
  2300

  2200
                                                                         18-day moving average 2
  2100

  2000

  1900
   Relative Strength Index 3
 percent
 100
  80                                              Overbought
  60
  40
  20                                               Oversold
   0
 07/21/06                      09/05/06           10/18/06                 12/01/06                 01/19/07


 Source: Bloomberg, L.P.
  Figure 3
  Index Breadth and Momentum Indicators -
  New York Stock Exchange
    New Highs and New Lows                   4
 index price                                                                                                 number of stocks
 9500                                                                                                                      300
                                                     New Highs
                                                     (right scale)                                                         250
 9000                 NYSE Composite price
                      (left scale)                                                                                         200

 8500                                                                                                                      150

                                                                                                 New Lows                  100
 8000
                                                                                                 (right scale)
                                                                                                                           50

 7500                                                                                                                     0
   07/21/06                        09/05/06                 10/18/06                 12/01/06                       01/19/07

    Momentum Oscillator              5


1000                                                                                                                        1000
 750                                                                                            Overbought                  750
 500                                                                                                                        500
 250                                                                                                                        250
     0                                                                                                                      0
 -250                                                                                                                       -250
 -500                                    Oversold                                                                           -500
 -750                                                                                                                       -750
-1000                                                                                                                      -1000
   07/21/06                        09/05/06                 10/18/06                 12/01/06                        01/19/07


    Market Breadth            6


index price                                                                                                      number of stocks
9500                                                                                                                    150000
                                                    Cumulative Advances - Declines
                                                    (right scale)                                                       140000
9000
               NYSE Price Index
               (left scale)                                                                                             130000
8500
                                                                                                                        120000

8000
                                                                                                                        110000

7500                                                                                                                   100000
  07/21/06                        09/05/06                10/18/06              12/01/06                         01/19/07



    Source: Bloomberg, L.P.
Figure 4
Index Breadth and Momentum Indicators -
Nasdaq Stock Market

   New Highs and New Lows                 4
index price                                                                                                 number of stocks
2600                                                                                                                   200
                                                                  NASDAQ, New Lows
2500                 NASDAQ Composite Price Index
                                                                  (right scale)
                     (left scale)                                                                                      150
2400
2300
                                                                                                                       100
2200                                                                         NASDAQ, New Highs
2100                                                                         (right scale)2
                                                                                                                       50
2000
1900                                                                                                                  0
  07/21/06                         09/05/06                 10/18/06                  12/01/06                  01/19/07


   Momentum Oscillator              5


600                                                                                                                     600

400                                            Overbought                                                               400

200                                                                                                                     200

    0                                                                                                                   0

-200                                                                                                                    -200

-400                                                                                                                    -400
                                                                                                 Oversold
-600                                                                                                                    -600

-800                                                                                                                   -800
  07/21/06                         09/05/06                 10/18/06                  12/01/06                   01/19/07


   Market Breadth           6
 index price                                                                                                   number of stocks
 2600                                                                                                                -264000
 2500                           NASDAQ Composite Price Index                                                         -266000
                                (left scale)
 2400                                                                                                                -268000
 2300                                                                                                                -270000
 2200                                                                                                                -272000
 2100                                                                  Cumulative Advances - Declines                -274000
                                                                       (right scale)
 2000                                                                                                                -276000
 1900                                                                                                               -278000
   07/21/06                         09/05/06                10/18/06                 12/01/06                 01/19/07



  Source: Bloomberg, L.P.
  Figure 5
  Volatility 7
      S&P100 and CBOE's OEX Volatility Index                   8
      index price
      680                                                                                                                          25

      660
                               S&P100 Price Index                                                                                  20
      640
                               (left scale)
      620
                                                                                                                                   15
      600

      580                                                                            VIX
                                                                                                                                   10
                                                                                     (right scale)
      560

      540                                                                                                                          5
       01/03/06        02/14/06    03/28/06   05/09/06     06/20/06       08/01/06     09/12/06      10/23/06    12/04/06    01/19/07



      Nasdaq 100 and CBOE's NDX Volatility Index                      9
      index price
      1900                                                                                                                       28
                     Nasdaq 100 Price                                                                                            26
      1800           Index (left scale)
                                                                                                                                 24

      1700                                                                                                                       22
                                                                                                                                 20
      1600                                                                                                                       18
                                                                                         VXN
                                                                                                                                 16
      1500                                                                               (right scale)
                                                                                                                                 14
      1400                                                                                                                        12
        01/03/06        02/14/06   03/28/06   05/09/06     06/20/06       08/01/06    09/12/06       10/23/06   12/04/06    01/19/07




      S&P500 Index Return and Implied Volatility
percent
25                                                                                                                               22

                        1-year average Returns                                 Implied Volatility                                20
20
                        (left scale)                                           (right scale)                                     18
15                                                                                                                               16

10                                                                                                                               14
                                                                                                                                 12
  5
                                                                                                                                 10
 0                                                                                                                                8
01/03/06            02/14/06    03/28/06   05/09/06      06/20/06     08/01/06       09/12/06     10/23/06      12/04/06    01/19/07


 Source: Bloomberg, L.P.
Figure 6
Put / Call Ratio
      CBOE Index and Individual Equity Put/Call Ratios                            10
     index price                                                                                                                ratio
     1600                                                                                                                       0.9
                                  Excessive Put Buying = High Put/Call Ratio = Overly Pessimistic = Bullish Sign
     1500                                                                                                                       0.8
     1400          S&P 500 Price Index
                   (left scale)                                                                                                 0.7
     1300
     1200                                                                                                                       0.6

     1100                                                                                                                       0.5
     1000                                                                                            Ratio for Individual
                                                                                                     Equity Options             0.4
      900                                                                                            (right scale)
      800                                                                                                                       0.3
                                  Excessive Call Buying = Low Put/Call Ratio = Overly Optimistic = Bearish Sign
      700                                                                                                                       0.2
        Jan-97                       Jun-99                     Nov-01                     Apr-04                      Dec-06



      Nasdaq 100 Price Index and Put/Call Ratio
     index price                                                                                                                ratio
     5000                                                                                                                       4.0
                                                                                                                                3.5
                                                                                                       Ratio
     4000
                             Index Price                                                               (right scale)            3.0
                             (left scale)                                                                                       2.5
     3000
                                                                                                                                2.0
     2000                                                                                                                       1.5
                                                                                                                                1.0
     1000
                                                                                                                                0.5
         0                                                                                                                      0.0
         Jan-97                      Jun-99                     Nov-01                     Apr-04                      Dec-06


      S&P 100 Price Index and Put/Call Ratios
     index price                                                                                                                 ratio
     1600                                                                                                                         1.8
     1500          Index Price                                                                    Ratio
     1400          (left scale)                                                                   (right scale)                   1.5
     1300
     1200                                                                                                                         1.3
     1100
     1000
                                                                                                                                  1.0
      900
      800
                                                                                                                                  0.8
      700
       Jan-97                        Jun-99                      Nov-01                     Apr-04                      Dec-06


  Source: Haver Analytics.
Figure 7
S&P 500 Economic Sectors - Index Returns
              5-Year Annualized Performance                              Year-to-Date Performance (as of 1/19)
               of S&P 500 Economic Sectors                                   of S&P 500 Economic Sectors
           percent                                                              percent
            17.8                                     Energy                        -4
             11.1                                    Materials                   2.6
              7.9                                Financials                      0.4
              7.4                                    Utilities                  -1.7
              6.7                                    Consumer Discretionary      3.3
              5.9                                    Industrials                 1.4
              4.4                                    Consumer Staples            1.9
              3.8                                    Info Technology             0.7
              1.3                                    Telecommunications         -1.6
              0.8                                    Health Care                 3.5
                     0   5       10        15   20                                      -5     -3         -1 0 1         3




            5-Year Annualized Performance                                  Year-to-Date Performance (as of 1/19)
            of Selected Geographical Indexes                                 of Selected Geographical Indexes
       percent                                                                  percent
            10.7                                          Nikkei 225, Japan       0.5
              5.5                                         Wilshire 5000, U.S.     2.3
              4.6                                         DAX, Germany            0.9
              2.7                                         FTSE 100, U.K.          0.3
                     0   2       4         6    8                                       0                       2




           5-Year Annualized Performance                                   Year-to-Date Performance (as of 1/19)
           of Selected Russell Style Indexes                                 of Selected Russell Style Indexes
       percent                                                                     percent
            13.6                                          2000 Small-Cap         -0.3
            12.1                                          1000 Value              0.2
             8.3                                          1000 Large-Cap          1.1
             4.5                                          1000 Growth             2.1
                     0       5        10        15                                      -0.5   0    0.5    1   1.5   2       2.5




      Source: Bloomberg, L.P.
Figure 8
S&P 500 Economic Sectors - Earnings Growth
           PE Ratios for S&P 500 Economic Sectors
     70
     60             2003:Q4           2005:Q4            2006:Q4               1/19/2007
     50             2004:Q4
     40
     30
     20
     10
       0




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           Earnings Growth for S&P 500 Economic Sectors
           (annualized percent change)
     30                                                                                                                                                         100
     25                     (179.6)                                                            5-YEAR              3-YEAR             1-YEAR                    80
                                          (99.4)
     20                                                                                                                                                         60
                                                                                                                                                                40
     15
                                                                                                                                                                20
     10
                                                                                                                                                                0
      5
                                                                                                                                                                -20
      0                                                                                                                                                         -40
             0
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           Operating Earnings Growth for S&P 500 Economic Sectors
           (annualized percent change)
     30                                                                                                                                                             100
     25                                                                  5-YEAR            3-YEAR              1-YEAR                                               80
     20                                                                                                                                                             60
     15                                                                                                                                                             40
     10                                                                                                                                                             20

      5                                                                                                                                                             0

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 Source: Standard & Poor's Compustat, Bloomberg, L.P.
Figure 9
PE Ratios and the Growth of Earnings

  Price-Earnings Ratios

  Percent                                                                                           Percent
  80                                                                                                     80

  70                                          S&P Smallcap 600                                             70
                                                                          Wilshire 5000
  60                                                                                                       60
                        S&P 500                                                Russell 2000
  50                                                                                                       50

  40                                                                                                       40

  30                                                                                                       30

  20                                                                                                       20

  10                                                                                                       10

   0                                                                          0
  1968:Q1      1975:Q1      1982:Q1      1989:Q1      1996:Q1      2003:Q1
        1971:Q3      1978:Q3      1985:Q3      1992:Q3      1999:Q3      2006:Q4


  S&P500 Price-Earnings Ratio and the Growth of Earnings
  Percent                                                                                              percent
  50                                                                                                       100

             Price-Earnings Ratio                                                                           80
  40         (left scale)                         2 yr Growth of Earnings11
                                                  (right scale)
                                                                                                            60

  30
                                                                                                            40

                                                                                                            20
  20

                                                                                                            0
  10
                                                                                                            -20

   0                                                                          -40
  1968:Q1      1975:Q1      1982:Q1      1989:Q1      1996:Q1      2003:Q1
        1971:Q3      1978:Q3      1985:Q3      1992:Q3      1999:Q3      2006:Q4



Source: Thomson Financial/First Call, Global Insight, Bloomberg L.P., Frank Russell Company, and Haver Analytics.
Figure 10
Breadth of the S&P 500
      One-Year Price Changes for Companies
      (median percentage change for each decile, ranked by performance)
   150


   100


     50


      0


    -50


   -100
          1968    1972        1976         1980   1984     1988   1992    1996   2000          2006:Q4
                                                                                        2004 2006
                                                                                               Q1 Q2 Q3 Q4

     Proportion of the S&P 500 Stocks Whose Price Increased Over One Year
percent
   100
    90
    80
     70
     60
     50
     40
     30
     20
     10
      0
       1968       1972        1976         1980   1984     1988   1992    1996   2000   2004    2006:Q3
                                                                                               2006
                                                                                               Q1 Q2 Q3 Q4
      Price-Operating Earnings Ratios for Companies
      (median ratio for each decile, ranked by PE ratio)
   100

    80

    60

    40

   20                                                                                                 PE=
  14.4
                                                                                                      14.4
     0
          1968    1972       1976          1980   1984     1988   1992    1996   2000   2004      2006
                                                                                                2006
                                                                                                Q1 Q2 Q3
    Source: Standard & Poor's Compustat.
 Figure 11
 Comparative Returns
       Dividend-Price Ratio 12 for the S&P 500 and the Real Corporate Bond Rate 13
   11.0                                                                                                 11.0
   10.0                                                                                                 10.0
    9.0                            Yield on A-Corporate Bonds Less Inflation Expectations               9.0
    8.0                                                                                                 8.0
    7.0                                                                                                 7.0
    6.0                                                                                                 6.0
    5.0                                                                                                 5.0
    4.0                                                                                                 4.0
    3.0                                                                                                 3.0
    2.0      DP Ratio                                                                                   2.0
    1.0                                                                                                 1.0
    0.0                                                                                                 0.0
     1982:Q1       1986:Q1          1990:Q1           1994:Q1       1998:Q1      2002:Q1        2006:Q1
                                                                                                2006:Q4


       Earnings-Price Ratio 12 for the S&P 500 and the Real Corporate Bond Rate
   14.0                                                                                                   14.0

   12.0                                                                                                   12.0

   10.0                                                                                                   10.0
                                                                                     EP Ratio
    8.0                                                                                                   8.0

    6.0                                                                                                   6.0

    4.0                                                                                                   4.0

    2.0    Yield on A-Corporate Bonds Less Inflation Expectations                                         2.0

    0.0                                                                                                   0.0
     1982:Q1            1986:Q1      1990:Q1          1994:Q1        1998:Q1      2002:Q1         2006:Q1
                                                                                                   2006:Q4


       Growth of Real Earnings for S&P 500
       (average rate of growth for 2 years forward)
   Percent                                                                                             Percent
   60.0                                                                                                   60.0


    40.0                                                                                                   40.0


    20.0                                                                                                   20.0


     0.0                                                                                                   0.0


   -20.0                                                                                                   -20.0


   -40.0                                                                                                   -40.0
      1982:Q1            1986:Q1      1990:Q1          1994:Q1        1998:Q1       2002:Q1        2006:Q1
                                                                                                    2006:Q4

Source: Haver Analytics, FAME.
Figure 12
Dividend Yields




    Dividend Yields for S&P 500 and Components
Percent                                                                                                           Percent
12.0                                                                                                                 12.0

10.0                                                                       Utilities                                 10.0

 8.0                                                                                                                 8.0
                                                           Financials

 6.0                                                                                                                 6.0
               Composite
 4.0                                                                                                                 4.0

 2.0                                          Transports                                                             2.0
                   Industrials

 0.0                                                                                                                 0.0
 1960:Q1         1965:Q4         1971:Q3      1977:Q2       1983:Q1     1988:Q4        1994:Q3     2000:Q2     2006:Q1
                                                                                                               2006:Q4




    Nonfinancial Corporate Dividend Expenditures
    and Personal Dividend Income
Percent                                                                                                             Percent
80.0                                                                                                                    8.0
                                           Personal Dividend Income
70.0                                                                                                                       7.0
                                           (percent of disposable income, right scale)

60.0
                       Nonfinancial Corporate Dividends                                                                    6.0
                       (percent of profits, left scale)
50.0
                                                                                                                           5.0
40.0
                                                                                                                           4.0
30.0

20.0                                                                                                                       3.0

10.0                                                                                                                   2.0
  1960:Q1        1965:Q4         1971:Q3       1977:Q2        1983:Q1     1988:Q4        1994:Q3     2000:Q2     2006:Q1
                                                                                                                  2006:Q3




 Source: Haver Analytics.
Figure 13
Economic Measures of Equity
Valuation
        Real Rate of Return on Nonfinancial Corporate Equity
        (from National Income and Flow of Funds Accounts)

  Percent                                                                                                          Percent
  13.0                                                                                                                 13.0
  12.0                                                                                                                 12.0
  11.0                                                                                                                 11.0
  10.0                                                                                                                 10.0
   9.0                                                                                                                 9.0
   8.0                                                                                                                 8.0
   7.0                                                                                                                 7.0
   6.0                                                                                                                 6.0
   5.0                                                                                                                 5.0
   4.0                                                                                                                 4.0
   3.0                                                                                                                 3.0
      1958                      1968                     1978                 1988                1998            2005

        Tobin's q 14

  2.5                                                                                                                 2.5

  2.0                                                                                                                 2.0

  1.5                                                                                                                 1.5

  1.0                                                                                                                 1.0

  0.5                                                                                                                 0.5

  0.0                                                                                                                0.0
  1952:Q1        1958:Q4        1965:Q3         1972:Q2         1979:Q1    1985:Q4     1992:Q3     1999:Q2      2006:Q1
                                                                                                                2006:Q3

  Profits of Nonfinancial Corporations
  Percent of GDP                                                                                            Percent of GDP
 12.0                                                                                                                   12.0
 11.0                                                                                                                   11.0
 10.0                                                                       Earnings Before Interest Payments           10.0
  9.0                                                                                                                   9.0
  8.0                                                                                                                   8.0
  7.0                                                                                                                   7.0
  6.0                                                                                                                   6.0
  5.0                                                                                                                   5.0
  4.0                                                                                               Profits             4.0
  3.0                                                                                                                   3.0
  2.0                                                                                                                   2.0
   1958:Q1    1963:Q4           1969:Q3        1975:Q2        1981:Q1     1986:Q4    1992:Q3      1998:Q2    2004:Q1
                                                                                                              2006:Q3

 Source: Haver Analytics, NYSE Fact Book, Flow of Funds Accounts.
Figure 14
Ratings and Default Rates
                                                                                               15
                   Changes in Moody's Ratings of Investment Grade Securities
       $ billion   and the S&P 500 PE Ratio
          90                                                                                                          50
                    Downgrades       (145.9)     (107.9)
          80                                                                                   SP500 PE Ratio         45
                    (left scale)
          70                                                                                   (right scale)          40
                              Upgrades
          60
                              (left scale)                                                                            35
          50
                                                                                                                      30
          40
                                                                                                                      25
          30
          20                                                                                                          20

          10                                                                                                          15
            0                                                                                                        10
            Dec-98       Dec-99         Dec-00         Dec-01         Dec-02    Dec-03    Dec-04        Dec-05   Dec-06

                                                                                                   15
                   Changes in Moody's Ratings of Speculative Grade Securities
       $ billion
                   and the S&P 500 PE Ratio
          70                                                                                                         50
                    Downgrades                                       (135.5)                   (79.9)
          60                                                                                                         45
                    (left scale)
                             Upgrades                                                                                40
          50                                                                       SP500 PE Ratio
                             (left scale)                                                                            35
          40                                                                       (right scale)
                                                                                                                     30
          30
                                                                                                                     25
          20
                                                                                                                     20
          10                                                                                                         15
            0                                                                                                         10
            Dec-98       Dec-99         Dec-00         Dec-01         Dec-02    Dec-03    Dec-04        Dec-05   Dec-06

                   Moody's Junk Bond Default Rate
       percent     and the S&P 500 PE Ratio
      25                                                                                                               50
                                                                                                                       45
      20
                                                                                                                       40
                                                                                            SP500 PE Ratio             35
      15
                                                                                            (right scale)
                                                                                                                       30
      10                                                                                                               25
                                                      Default Rate                                                     20
        5
                                                      (left scale)
                                                                                                                       15
        0                                                                                                              10
         Dec-98          Dec-99        Dec-00         Dec-01         Dec-02     Dec-03   Dec-04         Dec-05   Dec-06
 Source: Credqual database, Board of Governors of the Federal Reserve System.
Figure 15
Margin Debt and Expected Returns
                   Margin Debt and Stock Volatility
           40                                                                                                  1.5

           35         VIX                Outstanding Margin Debt Relative to                                   1.4
                      (left scale)       Total Market Value of Equities                                        1.3
           30                            (right scale)                                                         1.2
           25                                                                                                  1.1
           20                                                                                                  1
                                                                                                               0.9
           15
                                                                                                               0.8
           10                                                                                                  0.7
            5                                                                                                 0.6
           1987:Q1             1990:Q2         1993:Q3           1996:Q4     2000:Q1      2003:Q2       2006:Q4



                   Gross New Issuance and the S&P 500 PE Ratio
           ratio
           50                                                                                                  0.7
                                                      New Equity Security Issuance
                                                                                                               0.6
           40                                         Relative to Total Market Value
                                                      (right scale)                                            0.5
           30                                                                                                  0.4

           20                                                                                                  0.3

                                                                                                               0.2
           10
                                             PE Ratio
                                             (left scale)                                                      0.1

            0                                                                                                 0
           1987:Q1             1990:Q2         1993:Q3           1996:Q4     2000:Q1      2003:Q2       2006:Q4




                      Gross New Issuance of Securities by Nonfinancial Corporations
      $ billions
     150                                                                                                             35

                   Bonds                                                                                             30
                                                                                                                     25
     100           Equity
                                                                                                                     20
                                                                                                                     15
      50                                                                                                             10
                                                                                                                     5

       0                                                                                                           0
      1996:Q1               1998:Q1       2000:Q1           2002:Q1    2004:Q1     2006:Q2 Apr-06   Jun-06   Aug-06

     Sources: Haver Analytics, FAME.
Figure 16
Foreign and Domestic Holdings
    $ billions   Outstandings                                                                                              $ billions

     4000                                                                                                                        4000


     3000                                                                                                                        3000


     2000                                                                                                                        2000
                  Foreign Holdings of US Securities

                  US Resident Holdings of Foreign Securities
     1000                                                                                                                        1000


            0                                                                                                                    0
           1985:Q1             1989:Q2                1993:Q3                1997:Q4            2002:Q1            2006:Q3

                 Foreign Holdings of U.S. Equity Securities Relative to                                                              index
                                                                                                                                     price
     percent     Total Market Value of U.S. Equity
    14                                                                                                                          2000
    13
    12                                                                                                                          1500
     11
    10
                     Foreign Holdings of U.S. Securities                                                                        1000
       9             (left scale)
       8
                                                                                                           S&P 500              500
       7
                                                                                                           (right scale)
       6
      5                                                                                                                    0
     1985:Q1                 1989:Q2                1993:Q3                 1997:Q4             2002:Q1             2006:Q3
                                                                                                                    2006:Q4

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

       20                                                                                                                            300

                                                                        DJ World Stock Index,
                                                                                                                                     250
       15                                                               Excluding U.S.
                                                                        (right scale)
                                                                                                                                     200
                      U.S. Resident Holdings of
       10             Foreign Securities
                      (left scale)                                                                                                   150

         5
                                                                                                                                     100


        0                                                                                                                    50
       1985:Q1                1989:Q2                1993:Q3                 1997:Q4             2002:Q1             2006:Q4
                                                                                                                     2006:Q3

   Source: Haver Analytics, FAME, Flow of Funds Accounts of the United States.
Endnotes
Relationships described in these notes represent the thinking of those analysts who commonly cite these
indicators. While many analysts consider these to be commonly used indicators, they are not necessarily
endorsed as the prevailing tools used by the analyst community, and have not been validated by anyone at
the Federal Reserve Bank of Boston.

1. 50-Day, 200-Day Moving Average: Moving averages represent the average price
       investors pay for securities over a historical period, and present a smoothed
       picture of the price trends, eliminating the volatile daily movement. Because these
       lines offer a historical consensus entry point, chartists look to moving average
       trend lines of index prices to define levels of support or resistance in the market.
       When a chart trend is predominantly sideways, moving averages and the
       underlying series frequently cross, but during a time of prolonged increase or
       decrease the daily prices of a security typically 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 by securities remaining above or below
       their 200-day moving average for prolonged periods of time.

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

3. Relative Strength Index (RSI): This momentum oscillator measures the velocity
        of directional price movements. When prices move rapidly upward it may
        indicate an overbought condition, generally assumed to occur above 70 percent.
        Oversold conditions arise when prices drop quickly, producing RSI readings
        below 30 percent.

4. New Highs, New Lows: A straightforward breadth indicator, this is the 10-day
      moving average of the number of stocks on a given index or exchange making
      new 52-week highs or lows each day. This indicator also demonstrates
      divergence. If an index makes a new low, but the number of stocks in the index
      making new lows declines, there is positive divergence. Technical analysts refer
      to this as a lack of downside conviction, or a situation where stocks generally fell
      on a given day, but not by a significant margin that would indicate intense selling
      pressure and further declines. Conversely, in rising markets if an index makes a
      new high but the number of individual stocks in that index making new highs
      does not increase the rally may not be sustained.

5. Momentum Oscillator: Also known as the overbought/oversold oscillator, this
      indicator is calculated by taking the 10-day moving average of the difference
      between the number of advancing and declining issues for a given index. The
       goal of the indicator is to show whether an index is gaining or losing momentum,
       so the size of the moves are more important than the level of the current reading.
       This is first affected by how the oscillator changes each day, by dropping a value
       ten days ago, and adding one today. If the advance-decline line read minus 300
       ten days ago, and minus 100 today, even though the market is down again, the
       oscillator will rise by 200 because of the net difference of the exchanged days'
       values. This scenario suggests a trough. On the other hand, if today's reading
       was minus 500, it would demonstrate an acceleration of across the board selling.
           The magnitude in moves is useful when compared with divergence to the
       index price. If the Dow peaks at the same time the oscillator peaks in overbought
       territory, it suggests a top. If the index then makes a new high but the oscillator
       fails to make a higher high, divergence is negative and momentum is declining. If
       the index at this point declines and the oscillator moves into oversold territory it
       may again be time to buy. If the index rises but does not make new highs, but the
       oscillator continues to rise above a previous overbought level, upside momentum
       exists to continue the rally.

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

7. Volatility: With regard to stock price and stock index level, volatility is a measure of
       changes in price expressed in percentage terms without regard to direction. This
       means that a rise from 200 to 202 in one index is equal in volatility terms to a rise
       from 100 to 101 in another index, because both changes are 1 percent. Also, a 1
       percent price rise is equal in volatility terms to a 1 percent price decline. While
       volatility simply means movement, there are four ways to describe this
       movement:

       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 1990, measures the
      Volatility of the U.S. equity market. It provides investors with up-to-the-minute
      market estimates of expected volatility by using real-time S&P 100 (AMEX:
      OEX) index option bid/ask quotes. This index is calculated by taking a weighted
      average of the implied volatilities of eight OEX calls and puts. The chosen
      options have an average time to maturity of 30 days. Consequently, the VIX is
      intended to indicate the implied volatility of 30-day index options. Some traders
      use it as a general indication of index option implied volatility. (Source: CBOE)

9. CBOE Nasdaq 100 Volatility Index (VXN): Like the VIX, the VXN measures
      implied volatility, but in this case for Nasdaq 100 (NDX) index options, thereby
      representing an intraday implied volatility of a hypothetical at-the-money NDX
      option with thirty calendar days to expiration. Both the VXN and the VIX are
      used as sentiment indicators for the Nasdaq 100 and for the broader market,
      respectively. Higher readings and spikes generally occur during times of investor
      panic and at times coincide with market bottoms. Low readings suggest
      complacency and often occur around tops in index prices.

10. Put / Call Ratios: These ratios are used as contrary sentiment indicators. Unusually
        high ratio values, indicating much more put buying than call buying, occur when
        investors are extremely pessimistic and believe the market will continue to fall
        dramatically, at times from already low levels, and are often considered by
        analysts to indicate overly pessimistic sentiment. Because so many investors
        believe prices will continue to fall assets can become undervalued by
        contemporary valuations, and prices can move quickly back up. This phenomenon
        in capital markets is exacerbated by the volatility and leverage associated with
        derivative securities like options.
            The CBOE index ratios track put and call option trade volume for exchange-
        traded index options like the S&P 500 and Nasdaq 100. These ratios reflect
        sentiment of professional and institutional strategies because they are typically
        used as hedging tools by professional money managers. For example, a trader
        may purchase Nasdaq 100 puts as protection against loss if she also chose to
       simultaneously buy the Nasdaq 100 tracking stock (AMEX: QQQ). Her belief is
       that the Nasdaq 100 will rise, hence the outright purchase of shares, but has
       hedged her bet by purchasing puts option contracts, which cost a fraction of the
       underlying asset. Because of this institutional presence there is more put buying
       of index options compared with individual equity options, and the index put-call
       ratios are typically above 1. Index readings above 1.25 indicate much put buying
       and often occur when institutional investors are very pessimistic, and can lead to a
       short-term rally in response to this extreme negativity. Conversely, index ratios
       below 0.75 show very optimistic sentiment.
           The CBOE equity ratio, however, is composed of trade volume for individual
       equity options. While both retail and institutional investors purchase individual
       equity options, this ratio is considered by technical analysts to be an indicator of
       retail investor sentiment. Because there is less of the large volume put buying
       associated with institutional hedging, many analysts believe this is a more
       sensitive indicator of sentiment, especially among individual investors who may
       be purchasing puts when they actually believe the price of a particular stock will
       fall rather than as a hedge to a long position in that stock. Readings above 0.6
       suggest a rally may occur because too many investors are pessimistic. Traders
       believe readings below 0.3 show complacent investor psychology and that prices
       may decline in the future.

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

12. Earnings and Dividend Price Ratios: These ratios represent an investor's yield from
       earnings and dividend payments. Historically, the EP ratio often has exceeded the
       real return on bonds, reflecting the greater risk to shareholders for choosing equity
       investments. In recent quarters, the EP ratio has fallen below the return on bonds.
       Traditionally, the EP ratio has fallen below this real bond rate when earnings are
       expected to rise dramatically.

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

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

15. Moody's Ratings: Denotes the change in dollar amount of investment grade (above
      BA1) or speculative grade (BA1 or below) securities outstanding for a particular
      company 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.

								
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