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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.

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 255 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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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

Nasdaq Technical Update: Technology-Driven Index Poised to Retest 2018 High

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Technical Overview

  • On Tuesday (May 15), NASDAQ retested and held above the 7,320 level (April’s high – white horizontal trendline and white arrow in Figure 1).
  • Over the next 5 trading sessions, the index oscillated within a tight 90-point range (7,340 – 7,430). This price action was considered constructive as the consolidation occurred above short-term support.
  • Today (May 23), the index opened over 40 points lower, with an intraday low of 7,335, and moved up throughout the entire trading session. As the index opened at the daily low and closed at the daily high, it formed a white Marubozu candle (i.e. the candle has no upper or lower wick). While I haven’t done extensive testing on the pattern, other technicians have found the one-day pattern to carry almost no predictive power. It is the location of the candle that matters the most. Had it occurred just below a major resistance or after a sharp decline (i.e. indicating a “relief-rally”), the pattern may have proved to be insignificant. However, given the intraday low came less than 15 points away from the key 7,320 level, before moving sharply higher for the rest of the day, the pattern is deemed very significant.

Support levels:

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  • The 8 EMA (yellow line, currently at 7,378).
  • The lower support of the large trading channel, currently at 7,360 and rising by roughly 7 points/day (green trendline; only lower support shown to avoid overcrowding of the chart).
  • The 7,320 level (April’s high)
  • The intermediate-term support (ITS – violet trendline), currently at 6,990.

Resistance levels:

  • The May 14 high (7,458).
  • The 2018 high (7,600 – 7,637) range

Figure 1. NASDAQ Daily Chart

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Implications

  • Today’s move is expected to mark the beginning of the leg-up that retests the 2018 high. The index needs to move above the May 14 high (purple horizontal trendline) to confirm and activate a short-term upside target of 7,600 (i.e. just below the 2018 high).
  • Long positions in index-tracking ETFs or constituents recommended as long as the index remains above 7,320

Outlook

  • Short-term bullish above 7,320.
  • Long-term bullish if the index breaks above its March high.
  • Short-term neutral if the index breaks below 7,320 but remains above its ITS (violet trendline).
  • Long-term bearish if the index breaks below the ITS.

Featured image courtesy of 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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4.8 stars on average, based on 12 rated postsPublished author of technical research. In his work on price “gaps”, published in the 2018 International Federation of Technical Analysts’ Annual Journal, he developed a new technical tool for analyzing and trading the “gap” phenomenon – the “K-Divergence” (http://ifta.org/public/files/journal/d_ifta_journal_18). Besides obtaining a Master in Financial Technical Analysis, he has completed a BBA and an MBA from the Schulich School of Business in Toronto and has completed all exams for the CFA, CMT and CFTe designations. Currently, providing research to investment management and financial advisory firms. http://www.linkedin.com/in/konstantindimov




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Analysis

Falling Crypto Markets Signal Buying Opportunity

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After the spectacular performance of crypto prices in April, any person with a dose of common sense would have expected a big pull back this month.  By big pull back we are taking a page from the playbook of technical analysis so a 50% retrenchment would not be unusual.

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Until just recently, May was shaping up as a calm consolidation of prices.  With the exception of Ethereum, most of the major market caps pulled back around 10-12% in relatively calm trading.  Crypto skeptics will point out how bitcoin and others have underperformed stock indices like the Nasdaq Composite that is heading for a positive return of over 4%. But there there are more important signs taking place.

This week calm has turned into a sizable selling wave with bitcoin, bitcoin cash and Ethereum falling 11%, 23% and 24% respectively.  So suddenly, what’s causing this to happen?

According to a headline in CCN:

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The recent correction of the cryptocurrency market and the short-term decline in the price of bitcoin, Ethereum, and other major cryptocurrencies and tokens can be mainly attributed to three major factors: Bitfinex taxation policy, scandal of South Korea’s two largest cryptocurrency exchanges UPbit and Bithumb, and the initial sell-off of the Mt. Gox trustee’s bitcoin funds.

Accepting each of these factors in the face of the dramatic price declines should warm the hearts of investors.  Here is why it is a time for joy starting with the Bitfinex situation.

Bitfinex is the biggest bitcoin-to-USD exchange. Headquartered in the crypto tax haven of BVI, Bitfinex has requested personal information about it customers such as tax ID and social security numbers.  BVI is the home not only of Bitfinex but the chosen domicile of many ICOs.

The obvious source of this change in reporting policy can be drawn to U.S. pressure on BVI and the effect is clear.  Those investors who chose to resist the Bitfinex request sold their crypto.

We won’t go into all of the details of UPbit and Bithumb only to point out that this created a selling panic similar to Bitfinex.  Investors sell their crypto for good and obvious reasons but the reasons have little to do with the role of blockchain technology in the global economy.  In other words, when investment decisions are driven by fear, that spells opportunity nearly every time.

How Much Is the Downside?

Each of the factors mentioned is likely to be forgotten before any of us can imagine. Disaffected investors will simply find other exchanges to transact their business. This is not to condone those who choose to hide their identity.  It is simply a fact that there will will always be a location somewhere in the world that has loose tax reporting policies.

Knowing this means we need not fall into panic mode but actually welcome the crypto price correction and get ready to add to our portfolio.  The logical question that comes up is which name will produce the highest upside. The answer is that there is 30%-50% upside on average so choose your favorite flavor.

One thing worth remembering:  big cap names like bitcoin and Ethereun underperformed most altcoins during April, but are now showing the better downside relative performance.

So, in the next up leg, more risk orientated crypto investors will most likely get more action from names like EOS and Zcash to mention just two of many options. The market is displaying signs of rational analysis of risk and that is the sign of a maturing market.  In the long term scheme this is great news.

So answering the question, how much downside remains, is always an impossible task and can be a distraction.  Prices are back in a value range and that is the important conclusion.

Featured image courtesy of 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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4.4 stars on average, based on 75 rated postsJames Waggoner is a veteran Wall Street analyst and hedge fund manager who has spent the past few years researching the fintech possibilities of cryptocurrencies. He has a special passion for writing about the future of crypto.




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Analysis

Pre-Market: Turkish Lira Spooks Markets, as Dollar Still in Focus

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Stock markets are broadly lower today, as yesterday’s risk-off shift continues to dominate trading, with the Turkish currency woes, the Italian political standoff, and the weaker than expected European PMIs providing ample ammunition to bears.

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S&P 500 Futures, 4-Hour Chart Analysis

While the post-crash period since early February had its ups-and-downs, the best way to describe it is still a simple consolidation. In the US, trading has been taking place mostly in the range of only two sessions in early February, and the S&P 500 is still stuck in the middle of that range.

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Forex markets are in turmoil, as Dollar-centered trading continues across the board, and the hunting season for vulnerable emerging market currencies is still on. The recent strength in the reserve currency together with the rising yields sparked an exodus from more risky assets across the globe and with the Euro hitting another 6-month low today, the pressure will likely persist. Investors await tonight’s Fed meeting minutes which could make a huge impact on the Dollar and equities, especially if the central bank cools down rate hike expectations after the strong Dollar rally.

EUR/USD, 4-Hour Chart Analysis

First, it was Argentina, now it’s Turkey that’s in the center of attention, as the country plagued by a huge private Dollar debt load end rampant inflation is highly sensitive to rising rates and a weaker currency.

USD/TRY (Turkish Lira), Daily Chart Analysis

More experienced investors could have a strong feeling of déjà vu, as the Turkish leadership is blaming a concentrated attack against the country, while the market is waiting for the inevitable central bank intervention in the form of an emergency rate hike. For now, there is still hope that the storm will pass, but should an outright currency crisis break-out, rate hikes won’t be enough, and even capital controls will only provide a temporary solution, and a hard landing for the economy will be almost guaranteed.

Europe Also Down as Oil Pulls Back

DAX Index, 4-Hour Chart Analysis

European stocks which have been lifted by the falling Euro in recent weeks fell to two-week lows today, after the bearish PMI releases and the lower than expected British inflation figures. While the string of negative economic surprises continued, emerging market woes were largely ignored by investors so far, and the rising short-term trends are still mostly intact throughout the Old Continent.

Commodities are lower mixed amid the large currency moves, as the Dollar’s strength weighs on the whole asset class. Gold is still stuck below $1300 despite its recent resilience, while Oil is trading just off its highs, even as the OPEC is reportedly contemplating a supply increase following the “normalization” of oil prices. The cartel which, led by Saudi Arabia has openly been seeking higher prices

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 255 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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