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Market Overview

As North Korea Jolts Markets, Investors Look to Shiller PE Ratio for Signs of Overvaluation

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U.S. and global stock markets have come under intense selling pressure this week, as concerns over a North Korea standoff dampen investor sentiment.

Global Stocks Follow Wall Street Lower

The selloff that began on Wall Street after Labor Day has extended into Asia. Japanese stocks are down across the board on Wednesday, with the benchmark Nikkei 225 falling 0.3%.

In China, the Shanghai Shenzhen CSI 300 Index is down around half a percent. Hong Kong’s Hang Seng Index has plunged more than 1% through the midday.

Equity futures in Europe are also in the red, pointing to a volatile start to the European session.

U.S. stock markets resumed trading on Tuesday after the Labor Day long weekend. The benchmark S&P 500 Index fell 0.8% to 2,457.85, with eight of 11 sectors contributing to the decline. The Dow Jones Industrial Average plunged 234.25 points, or 1.1%, to 21,753.31. The technology-heavy Nasdaq Composite closed off 0.9% at 6,375.57.

The S&P 500 and Dow are coming off their fifth consecutive monthly gain in August. Meanwhile, the Nasdaq has finished higher in nine of the past ten months.

Are U.S. Stocks Overvalued?

Overvaluation risks continue to haunt U.S. equities. Wall Street has risen nearly 20% since the presidential election last November.

This has prompted a logical question: Are U.S. stocks 20% overvalued?

In the eyes of Nobel Laureate Robert J. Shiller, the answer is yes. Earlier this year, Shiller argued that his measure of the P/E, known as the CAPE, was at a comparable level to the one achieve just before the 1929 market crash. CAPE essentially refers to the ratio of current price to average annualized earnings over the past decade. In Shiller’s view, a high CAPE is generally followed by low subsequent returns.

The Shiller PE Ratio is presented below:

This view is even more coherent when we look at the underlying fundamentals that have guided the market higher.  While earnings have certainly played a part in the equities rally, the uptrend has been largely guided by hopes of faster economic growth under the Trump regime.

The U.S. economy grew 3% annually in the second quarter. That was the fastest quarterly expansion in over two years. The caveat is that it followed another mediocre quarter, where GDP growth amounted to a mere 1.4%.

In other words, hope and expectations are fueling the equity boom. As Wall Street’s major banks have argued, there is only so much investors can ignore before the tide begins to turn.

September is a notoriously difficult month for stocks. The next four weeks may prove especially taxing, as geopolitical risks and a congressional battle over the budget sway market opinion.

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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4.6 stars on average, based on 647 rated postsSam Bourgi is Chief Editor to Hacked.com, where he specializes in cryptocurrency, economics and the broader financial markets. Sam has nearly eight years of progressive experience as an analyst, writer and financial market commentator where he has contributed to the world's foremost newscasts.




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Analysis

Pre-Market Analysis And Chartbook: Risk Assets Under Pressure as Fed Minutes Loom

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Wednesday Market Snapshot

Asset Current Value Daily Change
S&P 500 2,789 -0.98%
DAX 30 11,715 -0.52%
WTI Crude Oil 69.79 -3.27%
GOLD 1,229 0.13%
Bitcoin 6,429 -0.49%
EUR/USD 1.1528 -0.38%

While yesterday we saw a huge oversold rally in equities, with the help of positive corporate earnings, the easing of the US-Saudi standoff and the stability in Treasury yields, today investor sentiment shifted yet again.

Negative news regarding the US-Chinese trade war, which is very likely to intensify before the US midterms, dismal European car sales, and continued worries with regards to the Italian budget and the Brexit process all acted as bearish catalysts.

DAX 30 Index CFD, 4-Hour Chart Analysis

Although European markets followed the lead of Wall Street and rallied today in early trading, the major indices are already well below their intraday highs, after turning back from the first levels of resistance. The DAX ran into resistance near the 11,850 level, below the crucial 12,000 level that could be the line-in-the-sand in deciding the long-term outlook going forward.

The German benchmark, the FTSE 100, and the EuroStoxx 50 are all in strong declining trends, and with the most important Asian markets also under strong short-term selling pressure, the US markets have a steeper and steeper mountain to climb should they resume the bull market.

Nasdaq 100 Futures, 4-Hour Chart Analysis

The Nasdaq opened slightly below yesterday’s cash close, underperforming the Dow and the S&P 500, and since then sellers have been in control of the market. The Russell 2000 that has been showing the way for the broader market lately is deep in the red as well, and we still think that risk assets are facing a prolonged correction if not an outright bear market.

Treasury yields are stable before today’s most important release, the minutes from the Fed’s latest meeting, but the dynamics of the quantitative tightening (the shrinking balance sheets of the global central banks) are likely behind the faltering of global risk assets.

VIX Pulls Back as Dollar Attempts Rally

VIX (US Volatility Index), 4-Hour Chart Analysis

The US Volatility Index fell significantly amid the bounce in stocks, hitting the key 17 level yesterday after plunging below 20, but the chart of the measure still confirms the regime change that would be consistent with a prolonged bearish period. While the bounce could still continue, forming a more complex pattern, the volatility-conditions could very important to judge the stability of the market.

EUR/USD, 4-Hour Chart Analysis

Forex markets continue to experience heavy trading, and today the US Dollar is trying to gain back momentum after its recent correction. Although the worse than expected housing data (building permits and housing starts both missed expectations) could have been bearish catalysts today, the Greenback held on to most of its early gains.

Should the reserve currency form a swing low and continue its broader rising trend, emerging markets could be back in the crosshairs, and risk assets would face another problem. All eyes are on the support zone near 1.15 in the EUR/USD pair, as a move below that would be a bullish sign for the USD, and it would warn of a test of the August low near 1.13.

ChartBook

Major Stock Indices

S&P 500 Futures, 4-Hour Chart Analysis

Dow 30 Futures, 4-Hour Chart Analysis

FTSE 100 Index CFD, 4-Hour Chart Analysis

EuroStoxx50 Index CFD, 4-Hour Chart Analysis

Nikkei 225 Futures, 4-Hour Chart Analysis

Shanghai Composite Index CFD, 4-Hour Chart Analysis

EEM (Emerging Markets ETF), 4-Hour Chart Analysis

Forex

USD/JPY, 4-Hour Chart Analysis

GBP/USD, 4-Hour Chart Analysis

EUR/GBP, 4-Hour Chart Analysis

AUD/USD, 4-Hour Chart Analysis

Commodities

WTI Crude Oil, 4-Hour Chart Analysis

Gold Futures, 4-Hour Chart Analysis

Copper Futures, 4-Hour Chart Analysis

Featured image from Shutterstock

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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4.6 stars on average, based on 377 rated postsTrader and financial analyst, with 10 years of experience in the field. An expert in technical analysis and risk management, but also an avid practitioner of value investment and passive strategies, with a passion towards anything that is connected to the market.




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Market Overview

HODL – No Diggity

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Hi Everyone,

The more I watch this the funnier it gets. Really glad to see it exploding on social media today.

Video: https://youtu.be/Ihd0moB0ehM

Hats off to our amazing marketing and PR teams for continuing to hasten crypto awareness in a fun and friendly way.

@MatiGreenspan
eToro, Senior Market Analyst

Today’s Highlights

  • Lay Down The FOMC
  • May in Brussels
  • Crypto Stability

Please note: All data, figures & graphs are valid as of October 17th. All trading carries risk. Only risk capital you can afford to lose.

Traditional Markets

The US session entered euphoria yesterday as American investors seemed to forget all the friction around the world and buy up stocks like they were going out of style.

However, the rampant enthusiasm has not been shared by Asian or European investors this morning. The rally has now been called into question.

Traders will be looking towards the Fed for guidance today as they release the minutes from their last meeting at 14:00 New York time.

More Brexit

While we await an update from Brussels regarding the Italian budget proposal, on the agenda for today will be Prime Minister Theresa May, who comes to express her proposals for a new exit deal

This evening’s dinner will be attended by Emmanuel Macron, Angela Merkel, and Donald Tusk, among others. However, although her speech is the highlight of the evening, apparently May will not be staying for dinner.

We should watch for updates starting from 19:00 Brussels. What people really want to see is some sort of new solution for the Irish border. This does seem to be the only sticking point left but like a Chinese finger trap, the harder politicians pull the further we get from a solution.

Tracking the strength of the Pound Sterling against the US Dollar has been pretty pointless. Due to the global nature of the Buck, the GBPUSD pair usually reflects Dollar strength more than anything. We can however, get a good picture of the Pound by watching the EURGBP.

As we can see the pair has been in a pretty solid range over the last year and is now near the lows.

Crypto Stability

Fortunately, Tether has come a long way towards recovering its one-to-one status with the USD and is now trading on major exchanges at a small discount of about 4 or 5 cents on the Dollar.

Despite the whipsawing that we’re seeing in virtually all the traditional markets, even including Monday’s Tether wobbles, the crypto market has been extremely stable over the last few weeks.

As we’ve stated before, one of the great attractions of the crypto asset class is that historically it bears little correlation with other markets (this week’s movements being a notable exception), making it a good hedging tool.

Please let me know if you have any questions, comments, or feedback. Let’s have an amazing day ahead!

This content is provided for information and educational purposes only and should not be considered to be investment advice or recommendation.

The outlook presented is a personal opinion of the analyst and does not represent an official position of eToro.

Past performance is not an indication of future results. All trading involves risk; only risk capital you are prepared to lose.

Cryptocurrencies can widely fluctuate in prices and are not appropriate for all investors. Trading cryptocurrencies is not supervised by any EU regulatory framework.

Best regards,
Mati Greenspan
Senior Market Analyst

Connect with me on….

eToro: @MatiGreenspan | Twitter: @MatiGreenspan | LinkedIn: MatiGreenspan | Facebook:MatiGreenspan

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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4.6 stars on average, based on 133 rated postsSenior Market Analyst at Etoro.com.




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Analysis

Stocks Surge on Earnings as Saudi Tensions Ease

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US stocks started the session in positive territory following the positive earnings surprises by Goldman Sachs (GS) and Morgan Stanley (MS), and from then on, the floodgates opened and we saw the strongest rally on Wall Street since March. President Trump’s more diplomatic stance towards Saudi Arabia helped the bounce in stocks, together with the stability in Treasury yields, but the most important driver was the huge bearish move of last week in stocks.

The major indices all gained more than 2% amid the furious oversold bounce, with, unsurprisingly, the Nasdaq gaining the most on the day, but last week’s deep correction is still far from being erased, and given the negative market internals, we remain defensive towards equities, even regarding the short-term time-frame.

S&P 500 Index Futures, 4-Hour Chart Analysis

We were expecting a similar move since Thursday when stocks reached deeply oversold short-term momentum readings, and as we noted then, these rallies should be treated as selling opportunities, due to the broad technical weakness in emerging markets, Europe, and now on Wall Street as well.

The S&P 500 all but cleared the oversold short-term readings thanks to today’s surge and the preceding choppy consolidation phase, and now the index is near the levels where we would look for a swing high in the coming week. The Volatility Index (VIX) plunged back below, and its behavior in the coming days will be key in judging the real strength behind today’s move.

Russell 2000, 4-Hour Chart Analysis

In spite of the strong move in small-caps as well, the Russell 2000 continues to look wounded from a technical perspective, and the index is facing very strong resistance levels. According to almost all breadth measures, under-the-hood, things are also ugly, and even if the US bull market has legs, this correction is very unlikely to end with a V-shaped bottom, as a lot of healing would be needed to maintain a sustained rally.

Calm US Session in Currencies Amid Stock Surge

USD/JPY, 4-Hour Chart Analysis

Forex markets also saw corrective price action, although the main safe-haven assets, the Japanese Yen and gold gave back only a small portion of their recent gains. The Dollar finished little changed before tomorrow’s key FOMC meeting minutes, while the Pound pulled back after a positive European session.

We expect a larger move in the Greenback in the coming days, and the consolidation in Treasuries could also come to an end, and another leg higher in Yields could be the trigger that ends the oversold bounce in stocks.

Copper Futures, 4-Hour Chart Analysis

Commodities had a quiet and choppy session, except the still active gold, and although crude oil managed to bounce amid the risk-on shift, copper failed to build on its recent resilience. the industrial metal is still stuck in a bearish consolidation pattern, with all eyes on the $2.75 support and the $2.87 resistance.

The way Chinese assets will react to today’s rally will be crucial for the commodity, as a meaningful bounce could help copper to a new swing high, despite the bearish long-term pressures.

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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4.6 stars on average, based on 377 rated postsTrader and financial analyst, with 10 years of experience in the field. An expert in technical analysis and risk management, but also an avid practitioner of value investment and passive strategies, with a passion towards anything that is connected to the market.




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