As
I noted a while back, John Hussman uses the Shiller CAPE Ratio in his valuation
analysis. That is simply a PE that is
the Price divided by the average earnings over the previous 10-years adjusted
for inflation. Using that metric the
current valuation looks very high now.
The
publication “FA Knowledge for the Sophisticated Advisor”
(http://www.fa-mag.com/marketeconomic-commentary/8253-is-the-shiller-pe-ratio-too-bearish-today.html)
included a discussion about that method of calculating PE from a paper by Kapyrin, and Cordaro.
They
wrote, “…in seeking to remove
reporting distortions by using an inflation-adjusted ten-year average of
earnings, it may be creating a distortion itself by including two of the
deepest ever earnings declines in a single ten-year period.” They went on to suggest that stocks are not
currently overvalued based on more traditional valuation techniques such as
price-to-book, price-to-sales, or more traditional methods of PE. They conclude, “…we feel that there is a
strong case to be made for owning stocks today…” Andy
Kapyrin, CFA, is director of research and Chris Cordaro, CFA, CFP, is chief
investment officer at RegentAtlantic located in
Morristown, N.J.
I
am inclined to side with Shiller and Hussman on this subject, but I thought I’d
present another view.
The
Navigate the Stock Market analysis is HOLD again today.
I sold on the 27 July sell signal at S&P 500 1301 and I am
defensively positioned with only a small amount of my portfolio invested in
stocks. (Zero stocks in the 401k.) I
remain 75% short in the trading portfolio.
(See
the page “How to Use the NTSM System” – the link is on the right side of this
page).
