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The Story of the Week: The Schiller P/E Hits 30

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Party Like It’s 1929 (or 1999)

 

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Long-Term Chart Shiller P/E Ratio of US Stocks

The Cyclically Adjusted P/E ratio (CAPE) is one of the most reliable valuation metrics out there.  It was designed by Robert Shiller, writer of the must-read book Irrational Exuberance, hence it is also called the Shiller P/E. The Shiller P/E It is widely used to judge the overall valuation “environment” of a stock market, with a great track record. It’s based on the traditional Price/Earnings ratio, but instead of one year’s earnings, it is calculated by using the 10-year average of earnings. This metric has a very high correlation with long-term (7-10 years) returns, but it has been attacked by experts constantly, as its short-term value is questionable.

The most disturbing thing about this indicator for the sell-side media is that it is currently right at 30 in the US, exactly at the same level as before the crash of 1929. The only time when the ratio was higher than this was towards the end of the dot-com bubble, and we all know how that ended. That said, this measure is far from being a timing tool, and in the 90’s stocks continued higher for a long time before finally turning lower after the bursting of the bubble.

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But what does that mean to you? To put it simply, stocks are expected to deliver returns a little bit over 0% in the next ten years. With a high probability, you can count with no returns whatsoever from you passive stock holdings. Also, if we compare that to the usual 10%/year assumptions regarding stocks, it’s apparent just how overvalued the US market is. But before you jump into shorts straight away remember that stocks almost doubled at the end of the dot-com mania even from these overvalued levels. That said, hedging your long-term bets or looking for alternative investments might be a wise idea, especially of you have a huge exposure to stocks.

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2 Comments

2 Comments

  1. corporate_citizen

    May 14, 2017 at 12:24 am

    Bubbles have usually been preceded by euphoria and zero fear of owning stock. Are we there yet? Or is there still not enough caution being thrown to the wind?

    • Mate Cser

      May 14, 2017 at 1:10 am

      Great question, but history tells us that all bubbles, manias, or panics have their own characteristics. I agree that the euphoria is not present, as investors still remember the two crashes of the pat 20 years, but that doesn’t change the long-term return prospects. Of course, a bubble phase in the bull market might still be ahead, but to judge that, technical analysis and market statistics are better tools than valuation measures.

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Analysis

Long-Term Cryptocurrency Analysis: All Majors Stretched as Ripple Finally Breaks-Out

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Although the previous leaders of the rally started to correct or at least consolidate in the wake of the overbought long-term setups, another batch of coins turned exponential, with Litecoin, Ripple, and Ethereum all registering lofty gains this week. Bitcoin, Monero, and Dash have been holding up well, and even drifted to new marginal highs during the period, while Ethereum Classic had a more volatile week, before moving to new highs today.

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XRP left the broad trading range that has dominated its market since May, and surged to new all-time highs while almost quadrupling in the process. As the coin was the only major on a long-term buy signal according to our trend model, and the move triggered a sell signal on Thursday, now all of our tracked coins are on sell signals.

Ripple could be in for further short-term gains but long-term investors should reduce their positions after this week’s spike. Support levels are found Major at the prior high near $0.4250 and in the $0.30-$0.32 range.

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XRP/USDT, Daily Chart Analysis

IOTA, which has been leading the market higher before is down by more than 30% off its all-time high, but given the exponential move before, an even deeper correction is likely in the coming weeks, and investors should wait until a more favorable setup to add to their positions. Strong support is only found at $3 and $1.5, but potential Fibonacci support is at $2.35.

IOT/USD, Daily Chart Analysis

Let’s see how the long-term charts of the other majors look this weekend.

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Analysis

Technical Analysis: Bitcoin Up Again as Altcoins Mixed in Volatile Trading

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Bitcoin is at a new all-time high today, although the momentum of today’s move is far below from what we saw recently, and the coin only managed to reach a marginal record high yet again. BTC is now worth $300 billion, and it is still trading right at the short-term trendline, inside a rising wedge pattern that shows a clear momentum divergence.

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With the short-term trend still being intact further gains are still possible, but as all the majors are overbought from a long-term perspective, we still advise investors to wait for a better buying opportunity before adding to their holdings. Primary support is still found near $13,000, with further levels at $11,300, $10,000, $9000, and stronger levels at $8200 and $7700.

BTC/USD, 4-Hour Chart Analysis

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 XRP entered a volatile short-term correction after its two-day surge after giving a short-term sell signal yesterday, and the coin spiked back towards $0.60 before settling down just below yesterday’s highs. The long-term setup also turned overbought thanks to the almost 300% rally, and now investors should reduce their holdings, even as further gains are still possible. Major support is still found at the prior high near $0.4250 and in the $0.30-$0.32 range.

XRP/USDT, 4-Hour Chart Analysis

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Analysis

Cryptocurrency Analysis: Ripple Continues Rampage as Litecoin and Ethereum Enter Correction

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Ripple remained in the center of attention in the segment after breaking out to a new all-time high yesterday, and the coin almost doubled in value, climbing above the $0.80 level. The currency concluded a 6-month long consolidation pattern with the move after being the only major on a long-term buy signal in our trend model.

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XRP gave a short-term sell signal today, while turning neutral regarding the long-term setup. Investors now shouldn’t add to their positions, although further gains are still possible, and reducing holdings somewhat is a good idea here. Major support is still found at the prior high near $0.4250 and in the $0.30-$0.32 range.

XRP/USDT, 4-Hour Chart Analysis

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While Bitcoin stagnated, and Bitcoin Cash jumped, Ethereum, Litecoin, Dash, and IOTA has been drifting slightly lower, although the recent gains are still mostly intact, and the basic setup in the segment is unchanged.

Litecoin fell below the $300 level after yesterday’s consolidation, and the coin faced strong selling pressure in the latter half of the session. The currency remains extremely stretched regarding the long-term momentum indicators, and although the short-term uptrend is still intact, a deeper correction is likely in the coming weeks, with key support levels found at $125 and $100, and weaker levels at $260 and $170.

LTC/USD, 4-Hour Chart Analysis

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