Best of the Week
Most Popular
1. US Housing Market Real Estate Crash The Next Shoe To Drop – Part II - Chris_Vermeulen
2.The Coronavirus Greatest Economic Depression in History? - Nadeem_Walayat
3.US Real Estate Housing Market Crash Is The Next Shoe To Drop - Chris_Vermeulen
4.Coronavirus Stock Market Trend Implications and AI Mega-trend Stocks Buying Levels - Nadeem_Walayat
5. Are Coronavirus Death Statistics Exaggerated? Worse than Seasonal Flu or Not?- Nadeem_Walayat
6.Coronavirus Stock Market Trend Implications, Global Recession and AI Stocks Buying Levels - Nadeem_Walayat
7.US Fourth Turning Accelerating Towards Debt Climax - James_Quinn
8.Dow Stock Market Trend Analysis and Forecast - Nadeem_Walayat
9.Britain's FAKE Coronavirus Death Statistics Exposed - Nadeem_Walayat
10.Commodity Markets Crash Catastrophe Charts - Rambus_Chartology
Last 7 days
Silver Bull Market Update - 7th Aug 20
This Inflation-Adjusted Silver Chart Tells An Interesting Story - 7th Aug 20
The Great American Housing Boom Has Begun - 7th Aug 20
Know About Lotteries With The Best Odds Of Winning - 7th Aug 20
Could Gold Price Reach $7,000 by 2030? - 6th Aug 20
Bananas for All! Keep Dancing… FOMC - 6th Aug 20
How to Do Bets During This Time - 6th Aug 20
How to develop your stock trading strategy - 6th Aug 20
Stock Investors What to do if Trump Bans TikTok - 5th Aug 20
Gold Trifecta of Key Signals for Gold Mining Stocks - 5th Aug 20
Stock Market Uptrend Continues? - 4th Aug 20
The Dimensions of Covid-19: The Hong Kong Flu Redux - 4th Aug 20
High Yield Junk Bonds Are Hot Again -- Despite Warning Signs - 4th Aug 20
Gold Stocks Autumn Rally - 4th Aug 20
“Government Sachs” Is Worried About the Federal Reserve Note - 4th Aug 20
Gold Miners Still Pushing That Cart of Rocks Up Hill - 4th Aug 20
UK Government to Cancel Christmas - Crazy Covid Eid 2020! - 4th Aug 20
Covid-19 Exposes NHS Institutional Racism Against Black and Asian Staff and Patients - 4th Aug 20
How Sony Is Fueling the Computer Vision Boom - 3rd Aug 20
Computer Gaming System Rig Top Tips For 6 Years Future Proofing Build Spec - 3rd Aug 20
Cornwwall Bude Caravan Park Holidays 2020 - Look Inside Holiday Resort Caravan - 3rd Aug 20
UK Caravan Park Holidays 2020 Review - Hoseasons Cayton Bay North East England - 3rd Aug 20
Best Travel Bags for 2020 Summer Holidays , Back Sling packs, water proof, money belt and tactical - 3rd Aug 20
Precious Metals Warn Of Increased Volatility Ahead - 2nd Aug 20
The Key USDX Sign for Gold and Silver - 2nd Aug 20
Corona Crisis Will Have Lasting Impact on Gold Market - 2nd Aug 20
Gold & Silver: Two Pictures - 1st Aug 20
The Bullish Case for Stocks Isn't Over Yet - 1st Aug 20
Is Gold Price Action Warning Of Imminent Monetary Collapse - Part 2? - 1st Aug 20
Will America Accept the World's Worst Pandemic Response Government - 1st Aug 20
Stock Market Technical Patterns, Future Expectations and More – Part II - 1st Aug 20
Trump White House Accelerating Toward a US Dollar Crisis - 31st Jul 20
Why US Commercial Real Estate is Set to Get Slammed - 31st Jul 20
Gold Price Blows Through Upside Resistance - The Chase Is On - 31st Jul 20
Is Crude Oil Price Setting Up for a Waterfall Decline? - 31st Jul 20
Stock Market Technical Patterns, Future Expectations and More - 30th Jul 20
Why Big Money Is Already Pouring Into Edge Computing Tech Stocks - 30th Jul 20
Economic and Geopolitical Worries Fuel Gold’s Rally - 30th Jul 20
How to Finance an Investment Property - 30th Jul 20
I Hate Banks - Including Goldman Sachs - 29th Jul 20
NASDAQ Stock Market Double Top & Price Channels Suggest Pending Price Correction - 29th Jul 20
Silver Price Surge Leaves Naysayers in the Dust - 29th Jul 20
UK Supermarket Covid-19 Shop - Few Masks, Lack of Social Distancing (Tesco) - 29th Jul 20
Budgie Clipped Wings, How Long Before it Can Fly Again? - 29th Jul 20
How To Take Advantage Of Tesla's 400% Stock Surge - 29th Jul 20
Gold Makes Record High and Targets $6,000 in New Bull Cycle - 28th Jul 20
Gold Strong Signal For A Secular Bull Market - 28th Jul 20
Anatomy of a Gold and Silver Precious Metals Bull Market - 28th Jul 20
Shopify Is Seizing an $80 Billion Pot of Gold - 28th Jul 20
Stock Market Minor Correction Underway - 28th Jul 20
Why College Is Never Coming Back - 27th Jul 20
Stocks Disconnect from Economy, Gold Responds - 27th Jul 20
Silver Begins Big Upside Rally Attempt - 27th Jul 20
The Gold and Silver Markets Have Changed… What About You? - 27th Jul 20
Google, Apple And Amazon Are Leading A $30 Trillion Assault On Wall Street - 27th Jul 20
This Stock Market Indicator Reaches "Lowest Level in Nearly 20 Years" - 26th Jul 20
New Wave of Economic Stimulus Lifts Gold Price - 26th Jul 20
Stock Market Slow Grind Higher Above the Early June Stock Highs - 26th Jul 20
How High Will Silver Go? - 25th Jul 20
If You Own Gold, Look Out Below - 25th Jul 20
Crude Oil and Energy Sets Up Near Major Resistance – Breakdown Pending - 25th Jul 20
FREE Access to Premium Market Forecasts by Elliott Wave International - 25th Jul 20
The Promise of Silver as August Approaches: Accumulation and Conversation - 25th Jul 20
The Silver Bull Gateway is at Hand - 24th Jul 20
The Prospects of S&P 500 Above the Early June Highs - 24th Jul 20
How Silver Could Surpass Its All-Time High - 24th Jul 20

Market Oracle FREE Newsletter

How to Get Rich Investing in Stocks by Riding the Electron Wave

Stock Market Investing, Not a Time for Buy and Hold

Stock-Markets / Investing 2009 Sep 16, 2009 - 08:02 AM GMT

By: Claus_Vogt


Diamond Rated - Best Financial Markets Analysis ArticleMany investors are finding that the current situation in the stock market is very difficult to read because the conclusions of different analytical approaches are unusually conflicting. So let’s review the three most important ones and discuss the relevance of each. Then I’ll tell you what I think is the best way to deal with them.

First …

We Have Fundamental Valuations

The most common and seasoned valuation measures are without doubt dividend yields and price-to-earnings ratios (P/Es).

Dividend yield is easy to figure out … and there’s no leeway for interpretation or adjustments whatsoever. Just divide the annual dividend payment by the share price … plain and simple.

Historically, the stock market was a bargain when the dividend yield was 6 percent or higher.

Right now the dividend yield is a paltry 2.8 percent for the Dow Jones Industrial Average, 2.5 percent for the S&P 500 and a miniscule 0.4 percent for the Nasdaq 100.

So according to this time-proven indicator, the stock market has to be rated expensive.

Now, calculating a P/E is not as straightforward as it once was. Back in the day, all analysts based the price-to-earnings ratio on earnings calculated using Generally Accepted Accounting Principles (GAAP).

To keep the bullish fire lit, Wall Street concocted creative ways to report earnings.
To keep the bullish fire lit, Wall Street concocted creative ways to report earnings.

But during the 1990s, when stocks got ever more expensive, Wall Street analysts came up with new earnings concepts allowing them to stay bullish. And they tended to adjust reported earnings arbitrarily.

In my opinion, GAAP earnings are the best way to get a proper picture of what’s going on. And the SEC agrees. The Sarbanes-Oxley Act of October 2002 requires public companies to always include a GAAP financial measure.

So I recommend sticking with GAAP earnings. And I also recommend using them on a twelve-month trailing basis instead of relying on ever-optimistic Wall Street estimates.

The normal historical range for the GAAP P/E is less than 10 (undervalued) to 20 (overvalued). The current figure is 137 … a record high! So according to this indicator, stocks are extremely overvalued.

And even if we use a non-GAAP earnings measure, like operating earnings, and use forward estimates … the market is now trading at twelve times its two-year forward earnings. The historical mean for the two-year forward multiple is about seven.

Bottom line: Based on the two classic valuation methods, this market definitely does not look cheap.

And remember …

Fundamental Valuations Are Only Long-Term Indicators

Unfortunately, valuation measures tell you nothing about probable stock market returns for the coming year or two. They’re better used for a seven-to ten-year time frame.

In fact, if you rely solely on traditional valuation measures, you’ll be out of the market for many years just waiting for things to get cheap. The chart below shows just how expensive things are right now …

S&P 500, GAAP Earnings, P/E Ratio, and Dividend Yield, 1926-2009


This means you have to look at other methodologies, too. Especially if you want to make money over shorter time frames.

So let’s move to another way of looking at the market …

The Macroeconomic Picture Is Somewhat Mixed …

In addition to valuation methods, we have macroeconomic indicators.

Unfortunately the picture they’re currently painting is very dire. The economy is in a post real estate bubble environment. Historically, the after effects of real estate bubbles are not only devastating but last many years. And there’s just no reason to assume that this time should be different.

Look at what’s happening already:

  • The banking industry is in shambles … banks are failing faster than any time since the Great Depression. The consumer is over his head in debt and unlikely to go on a buying binge anytime soon. The labor market is depressed without any sign of betterment. Commercial real estate is starting to crack. A new wave of home mortgage credit resets are in the offing. Foreclosures are making new highs as are credit card loan defaults.
  • At the same time the government is drowning in red ink.

I could go on and on. But I think you get the picture.

In spite of all the current problems, two LEIs are rebounding.
In spite of all the current problems, two LEIs are rebounding.

However, there’s one bright spot: Leading economic indicators (LEI). The year-over-year change of the Conference Board’s Index of LEI turned positive in July after hitting a cyclical low of minus 4 percent in March. This is signaling the end of the recession and a bounce.

Another leading economic indicator, the Index of the Economic Cycle Research Institute, has risen even more strongly. It has just registered its strongest rebound since the early 1980s.

Unfortunately these two leading economic indicators do not look very far into the future. Yes, they’re signaling the end of the recession and some kind of a rebound. But they tell us nothing about the durability of the rebound.

It’s very possible that they could reverse direction soon, and that the rebound is nothing more than a flash-in-the-pan made possible by a combination of huge governmental stimulus and the severity of the 2008 slump.

So in the end, I would say macro-economic indicators are mixed at this point. But …

Technical Analysis Yields A Medium-Term Bullish Outlook …

The last way of looking at the stock market is through technical analysis. And here we get a very clear picture …

The long-term trend has been down since 2000. But the medium-term trend has clearly turned up this year.

If you look at the chart below, you’ll see a huge bottoming formation of the S&P 500 index starting in November 2008. In July 2009, the index broke above the neckline of this formation signaling a medium-term trend change from down to up and generating a buying signal.

Since then the trend following indicators, like the 200-day moving average and the advance-decline line, have confirmed the medium-term up trend.

S&P 500 Large Cap Index


This shows that a medium term up trend has started. And we should expect a continuation of this trend until evidence of another trend change starts to appear.

So based on the technicals, I see more upside for stocks.

Conclusion: Longer-Term Still Bearish, But Medium-Term I’m Bullish

Bringing all the above together you could draw the following picture for the stock market:

  • Valuations are high on a historical basis and a long-term negative, but medium-term they’re meaningless.
  • Macroeconomics are longer-term negative or at least doubtful, but medium-term bullish.
  • The technical analysis is long-term bearish, but medium-term bullish.

So all in all there’s a rather strong case for a medium-term bullish forecast for the stock market, tempered by a long-term bearish background. This picture should prevent you from getting careless or euphoric and make it clear that there are risks with getting fully invested.

But it also seems to be prudent to consider being partially invested in the stock market to profit from any medium-term surges. You just have to be very flexible and on the lookout for signs of renewed weakness.

This is no time for buy and hold investors. But there are attractive opportunities for medium-term oriented investors willing to buy now and get out on a moment’s notice.

Best wishes,


This investment news is brought to you by Money and Markets . Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit .

Money and Markets Archive

© 2005-2019 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.

Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules