Monday, August 18, 2014

Today's Market
by Dr Invest



While reading some research today, I came across a chart that confirms some of the ideas and concerns I have about the present market. Before I present the chart, let me be clear, in the short run, I think the market will continue its climb. Dr Robert Schiller's use of "Irrational Exuberance", a professor at Yale, was picked up by Alan Greenspan and used in a speech he made in 1996. Dr Schiller is also know for developing a more accurate measure of P/E ratio (price to earnings). He called that measure CAPE or Cyclically Adjusted PE. Schiller recently affirmed that stock prices had too rich valuations and were over priced. This is contrary to some Analysts who are trying to tell the public that "now is the time to buy because stocks have never been cheaper. 

Daniel J. Want, recently improved on the CAPE ratio by using the Baa yield. This seems to smooth out the data and give a more correct valuation. For those wanting the details, go to: http://thecrux.com/this-powerful-indicator-says-a-major-top-is-approaching/

Here is the chart:



Note the sudden dip around 2012 in the RED LINE, stock valuations had begun to fall, but were pushed higher as Bernanke started the $60bln per month by back of bonds. The valuation of stocks as risen, almost as high as any of the previous valuations preceding each recession. Stock are NOT at all-time lows, but all-time highs. As my chart below shows, copper prices dropped in May 2012, but the S&P continued to climb. Copper and the S&P are typically correlated and move together. In the yellow frame is copper and the S&P moving opposite of one another. This is at the same time in 2012, in the chart above, that shows stocks moving into rich valuations due to FED stimulus. 



Enjoy this exuberant moment... and it well could last, pushing the S&P to remarkable heights... but when the sudden and incalculable moment arises for its fall, without warning the stock market will make 2009 seem like a picnic. 

My suggestion, be cautious until the market has turned downward.

(Note: the above information is for entertainment purposes only and not to be used in any way as investment advice.)

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