I’ve written about the Shiller P/E, also refferred to the cyclically adjusted P/E (CAPE) or P/E10, on many occassions (P/E10 = Price divided by 10-year average earnings, adjusted for inflation). Here are some charts from Crestmont Research that present a good persoective of the P/E10 at the beginning of a Bull Market (first chart) and the P/E10 at the end of a Bear market (second chart).
Ed Easterling wrote, “Every secular bear cycle prior to our current one followed a secular bull that ended with P/E in or near the red zone. That set the starting point for every adjacent secular bear. But this time, the super secular bull of the late 1990s ended nearly twice as high—it was a major bubble. Therefore, it is realistic to expect that our current secular bear might last a lot longer or be twice as gnarly as past secular bears.”
Chart from Crestmont Research at...
http://www.crestmontresearch.com/docs/Stock-Nightmare.pdf
Chart from Crestmont Research at...
http://www.crestmontresearch.com/docs/Stock-Nightmare.pdf
As the above chart shows, the current P/E10 is in the range for the
start of a BEAR market start; not the start of a Bull market.
“THE FUTURE: DECADES (Ed Easterling)
“If history is a guide, the inflation rate will at some point trend away
from the present price stability. The result will be a significant declining
trend in P/E. If this occurs over a few years, the market losses will be
dramatic. More likely, it will take a decade or longer. That will enable the
underlying economy and baseline earnings to grow, thereby offsetting the
decline in P/E. As we have seen from history, that means another decade or
longer of near-zero returns.” Full
commentary at…http://www.crestmontresearch.com/docs/Stock-Nightmare.pdf
Not everyone agrees that the P/E10 (Shiller PE) is a valid valuation methodology. Here’s another view…
SHILLER
P/E MISLEADING (a second opinion)
“Shiller
PE Continues To Mislead Investors, S&P 500 Is Fairly Valued In Early 2013” (Seeking
Alpha, Chuck Carnevale) “...earnings of the S&P 500 increase much more often than they fall. This clearly, at least, has been true for the last couple of decades.
This creates a problem for investors that I find appalling. For the
great majority of the time, the Shiller calculated PE ratio will generally
indicate that the market is overvalued. Consequently, investors who buy into
this thesis will generally tend to avoid investing in stocks. Yet, if they were
to calculate valuation based on actual numbers, they would more often than not
find that stocks are fairly priced to even cheap, instead of overvalued.
Therefore, they are often avoiding stocks at precisely times when the risk of
investing in them is lowest, and simultaneously, when the rewards for owning
them are highest.”
Full story at...http://seekingalpha.com/article/1113201-shiller-pe-continues-to-mislead-investors-s-p-500-is-fairly-valued-in-early-2013
MY TAKE ON THE P/E10
I have examined the Shiller PE in this blog before; the analysis looks valid
to me, but it’s always good to see another perspective. Here’s a prior blog that discuss the Shiller
P/E / CAPE / or P/E10 in the context of predicting future returns based on a
given P/E10. http://navigatethestockmarket.blogspot.com/2012/04/stock-market-advice-from-darth-vader.html
MARKET RECAP
Wednesday the
S&P 500 finished basically unchanged at 1473 (rounded). VIX fell about 1% to 13.42.
NTSM
The NTSM analysis
switched to HOLD Wednesday. Only the Price
indicator remains positive.
MY INVESTED POSITION
Based on a BUY
signal 7 of 9-days, and more importantly, consecutive closes above the prior
high of 1466, I moved into the stock market at 1471 on the S&P 500 on 14
January. I am currently invested in a
range of near 50% invested in stocks. 
