Market Direction: BEARISH alert
issued 8/10/2017
Watch out for your exposure to U.S. stocks.
That’s the message of history, even if it isn’t the message of Wall Street analysts and strategists.
As stock prices soar to new heights, the S&P 500 Index SPX, +0.14% has now reached levels of overvaluation only ever seen during the dot-com bubble and in 1929 — an eye-watering 31 on the measure known as the “Shiller PE” ratio.
But even if we fudge the numbers and exclude the depressed earnings from the global financial crisis a decade ago, we still get a reading of 25.5. That’s still way up there, and in almost 150 years, every time stocks have gotten anywhere close, they’ve come crashing down again.
Long-term view
The Shiller PE is named after Yale economics professor and Nobel laureate Robert Shiller, who tracks the data and popularized the concept. It compares stocks against the average earnings of the past 10 years, rather than just one year, as Wall Street likes to do. The argument is that longer-term measures smooth out the distortions of booms and busts.
Shiller has tracked his data back to 1881. The stock market’s average reading has been about 16 over that time. But that’s masked a wide range, from the single digits all the way up to 45 in early 2000.
Critics sometimes like to argue that the reading of late has been distorted because it includes the abysmal corporate earnings during the 2008-2009 crash. So I decided to exclude those, and just compare stock prices to the average of the past five years, rather than 10, to see how that affected the measure.
And, yes, it does. But it only cuts the reading from 31 to 25.5.
For reference, it’s only reached a level of about 25 on five previous occasions: 1901, 1928-9, 1966, 1996-2002 and 2003-2007. Each one ended with a crash.
“This time is different”
People on Wall Street always tell you “this time is different,” but it never has been yet. The “new era” of the 1920s, the “Nifty Fifty” stocks of the 1970s, the “new economy” of the 1990s. Investors in those eras have been told to ignore the lessons of the past and look only to the bright and unprecedented future.
Each time they’ve lost their shirts.
Other metrics with long-term records are also flashing yellow or red. Those include the so-called Tobin’s q, which compares stock valuations to how much it would cost to rebuild all those companies from scratch; and the Warren Buffett indicator, which compares the value of the stock market to the size of the national economy. (Buffett himself has somewhat backed away from that measure recently.)
But who knows? Maybe this time “really is” different. If it is, that itself would be different.
$tockMarketDirection proprietary model is currently BEARISH. We strongly encourage you to monitor positions closely, exercise proper money management strategies and follow us at $tockMarketDirection for ALERTS we may issue advising a change in the current market direction. Stay tuned and follow us. If you have a testimonial or comment of how this website has helped you we would like to know, email us. Share with a friend.
Currently the stock market is holding up even though our proprietary model indicated the stock market should be going down...
That’s the message of history, even if it isn’t the message of Wall Street analysts and strategists.
As stock prices soar to new heights, the S&P 500 Index SPX, +0.14% has now reached levels of overvaluation only ever seen during the dot-com bubble and in 1929 — an eye-watering 31 on the measure known as the “Shiller PE” ratio.
But even if we fudge the numbers and exclude the depressed earnings from the global financial crisis a decade ago, we still get a reading of 25.5. That’s still way up there, and in almost 150 years, every time stocks have gotten anywhere close, they’ve come crashing down again.
Long-term view
The Shiller PE is named after Yale economics professor and Nobel laureate Robert Shiller, who tracks the data and popularized the concept. It compares stocks against the average earnings of the past 10 years, rather than just one year, as Wall Street likes to do. The argument is that longer-term measures smooth out the distortions of booms and busts.
Shiller has tracked his data back to 1881. The stock market’s average reading has been about 16 over that time. But that’s masked a wide range, from the single digits all the way up to 45 in early 2000.
Critics sometimes like to argue that the reading of late has been distorted because it includes the abysmal corporate earnings during the 2008-2009 crash. So I decided to exclude those, and just compare stock prices to the average of the past five years, rather than 10, to see how that affected the measure.
And, yes, it does. But it only cuts the reading from 31 to 25.5.
For reference, it’s only reached a level of about 25 on five previous occasions: 1901, 1928-9, 1966, 1996-2002 and 2003-2007. Each one ended with a crash.
“This time is different”
People on Wall Street always tell you “this time is different,” but it never has been yet. The “new era” of the 1920s, the “Nifty Fifty” stocks of the 1970s, the “new economy” of the 1990s. Investors in those eras have been told to ignore the lessons of the past and look only to the bright and unprecedented future.
Each time they’ve lost their shirts.
Other metrics with long-term records are also flashing yellow or red. Those include the so-called Tobin’s q, which compares stock valuations to how much it would cost to rebuild all those companies from scratch; and the Warren Buffett indicator, which compares the value of the stock market to the size of the national economy. (Buffett himself has somewhat backed away from that measure recently.)
But who knows? Maybe this time “really is” different. If it is, that itself would be different.
$tockMarketDirection proprietary model is currently BEARISH. We strongly encourage you to monitor positions closely, exercise proper money management strategies and follow us at $tockMarketDirection for ALERTS we may issue advising a change in the current market direction. Stay tuned and follow us. If you have a testimonial or comment of how this website has helped you we would like to know, email us. Share with a friend.
The all-time lows since our initial
recommendation to go SHORT
this market. Here is how the markets have performed:
Stock Market
Direction Recommendation (8/10/2017)
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Dow
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down 1.27 points a 0.01% gain
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8/11/17
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Nasdaq
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down 0.68 points a 0.01% gain
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8/11/17
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S&P 500
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down 0.36 points a 0.01% gain
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8/11/17
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Related Link: http://www.stockmarket-direction.com/
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