Best of the Week
Most Popular
1.US Paving the Way for Massive First Strike on North Korea Nuclear and Missile Infrastructure - Nadeem_Walayat
2.Trump Reset: US War With China, North Korea Nuclear Flashpoint - Video - Nadeem_Walayat
3.Silver Junior Mining Stocks 2017 Q2 Fundamentals - Zeal_LLC
4.Soaring Inflation Plunges UK Economy Into Stagflation, Triggers Government Pay Cap Panic! - Nadeem_Walayat
5.The Bitcoin Blueprint To Your Financial Freedom - Sean Keyes
6.North Korea 'Begging for War', 'Enough is Enough', is a US Nuclear Strike Imminent? - Nadeem_Walayat
7.Bitcoin Hits All-Time High and Smashes Through $5,000 As Gold Shows Continued Strength - Jeff_Berwick
8.2017 is NOT "Just Another Year" for the Stock Market: Here's Why - EWI
9.Gold : The Anatomy of the Bottoming Process - Rambus_Chartology
10.Bitcoin Falls 20% as Mobius and Chinese Regulators Warn - GoldCore
Last 7 days
The 5 Biggest Bubbles In Markets Today - 20th Sep 17
Infographic: The Everything Bubble Is Ready to Pop - 20th Sep 17
Americans Don’t Grasp The Magnitude Of The Looming Pension Tsunami That May Hit Us Within 10 Years - 20th Sep 17
Stock Market Waiting Game... - 20th Sep 17
Precious Metals Sector is on Major Buy Signal - 20th Sep 17
US Equities Destined For Negative Returns In The Next 7 Years - 3 Assets To Invest In Instead - 20th Sep 17
Looking For the Next Big Stock? Look at Design - 20th Sep 17
Self Employed? Understanding Business Insurance - 19th Sep 17
Stock Market Bubble Fortunes - 19th Sep 17
USD/CHF – Verification of Breakout or Further Declines? - 19th Sep 17
Blockchain Tech: Don't Say You Didn't Know - 19th Sep 17
The Fed’s 2% Inflation Target Is Pointless - 19th Sep 17
How To Resolve the Korean Conundrum  - 19th Sep 17
A World Doomed to a Never Ending War - 19th Sep 17
What is Backtesting? And Why You Need Backtesting System? - 19th Sep 17
These Two Articles Debunk The Biggest Financial Nonsense I See In The Media - 18th Sep 17
Bitcoin Price Crash 40% In 3 Days Underlining Gold’s Safe Haven Credentials - 18th Sep 17
The Sum of Risks – Global, Strategic, Political, and Financial - 18th Sep 17
The Netflix Of Canada’s Cannabis Boom - 18th Sep 17
Stock Market Sentiment Speaks: Either You Learn From The Events Of The Past Week, Or You Are Hopeless - 18th Sep 17
SPX 2500 … At Last! - 18th Sep 17
Inflation Lies, Lies and OMG More Lies - 18th Sep 17
How to Choose right Forex Trader? - 18th Sep 17
Who Has Shaped the World the Most? The Dozen Greatest Achievers - 17th Sep 17
Riding the ‘Slide’: Is This What the Next Stocks Bear Market Looks Like? - 17th Sep 17
Gold Up, Markets Fatigued As War Talk Boils Over - 17th Sep 17
Predicting the Future of the U.S. and the World - 16th Sep 17
Deceit in the Financial Food Chain - 16th Sep 17
Gold GLD ETF Investment Resuming - 16th Sep 17
Extreme Weather & Energy Markets: What's Next? - Video - 15th Sep 17
Trump’s Path to IP Wars - 15th Sep 17
GBP USD Approaches Fibonacci Target - 15th Sep 17
Higher US Interest Rates May Force Higher Inflation Rates - 15th Sep 17
Stock Market Investors: Taking the Road "Less Traveled" Has Its Perks - 15th Sep 17
The 3 Best P2P Lending Platforms For Investors In 2017—Detailed Analysis - 15th Sep 17
The US Debt Bubble Will Soon Warrant Serious Measures - 15th Sep 17
Why it is Often Difficult to Sell a House Fast - 15th Sep 17
S&P 500 At New Record High, Will It Break Above 2,500? - 14th Sep 17
Capital Market Trends - 14th Sep 17
Mike Maloney: The Top 10 Reasons I Own Gold and Silver - 14th Sep 17
The Only Real Europe is Greece - 14th Sep 17
7 Security Tips for Online Traders - 14th Sep 17

Market Oracle FREE Newsletter

5 Markets Ready to Move Before Year-End. Eexpert Analysis and New Trading Opportunities

3 Lesser-Known Charts Revealing a Massive Stock Market Disconnect

Stock-Markets / Stock Market 2017 Aug 22, 2017 - 05:18 PM GMT

By: John_Mauldin

Stock-Markets

What’s a fair price for a share of stock?

In theory, it’s easy to define. The fairest price lies at the intersection of the company’s supply and demand curves. The market price at any given moment reveals exactly where that point is.

The averaged prices of all stocks in an index, appropriately weighted, tell us the same for market benchmarks.


In practice, the calculation is not so simple, because it is human beings who make the decisions—if not themselves, then by telling their computers how to decide. Humans don’t always make rational choices.

As such, the stock market is the scene of a never-ending debate over who is the most rational actor.

Although I’m not perma-anything, today I’ll put on a bear hat and review some of the lesser-known indicators pointing to extreme overvaluations.

Hours of Work Needed to Buy the S&P 500 at Record Highs

We begin with this Bank of America chart. Look at how many hours the average worker has to work in order to buy a notional share of the S&P 500. Amazing. Kudos to the B of A analyst who worked this data up.

You can see how valuations that are measured in this way skyrocketed in the 1990s bull market, then plunged in the following bear market and recession. They climbed again ahead of the 2008 crash yet could not reach their late-1990s peak. But now they have.

Equity capital is at a historical high (going back to 1964) relative to labor. Two factors could tug the line down to a more normal level: sharply higher wages or sharply lower stock prices.

Of course, I guess prices could go sideways for a few decades as wages rise. But on the probability scale, I put that outcome pretty close to zero.

The Number of Indexes Quadrupled in Just Two Years

The S&P 500 is just one index, of course. There are many others. In fact, choosing an index is now even harder than choosing a stock is.

The upper line is staggering: Since 1995, the number of listed stocks has fallen 42%? What market force could be causing that? Actually, I can think of several.

The financialization of the markets since 1995 makes it cheaper to buy your competitors than to actually invest in equipment to compete. This has has produced a constant stream of mergers.

This is not creative destruction. It has not resulted in new jobs and greater competition. It is, rather, a result of the central banks of the world messing with the free market and of businessmen optimizing the value of their earnings and cash. When cash is cheap, buy your competitors.

Another clear culprit is regulatory overreach, making it harder for small companies to go public. I am closely aligned with a few private companies. They could easily go public at nine-figure valuations, but the thought of being public companies is simply abhorrent to their management.

When Uber and Airbnb and a host of their fellow unicorns do not go public, something is clearly wrong with the system. Congress should step in and take control of its regulatory creations, but it appears Congress can’t even do the simple stuff like health care and tax reform.

In any case, just in the last year the number of indexes crossed above the number of stocks—and is pointed higher still. The increasing popularity of index-based ETFs is driving this trend, but at some point, momentum has to slow.

But I don’t think that is going to happen soon, because the money that is being made by successful ETFs is such a lure that anybody with the distribution process thinks he or she can do it. Duplicating somebody else’s ETF? Not a problem; it’s all in your distribution chain.

And the market is eating the index ETFs up.

The Number of Upward Trending Stocks Has Plunged

Our next chart comes from my friend, the always-interesting John Hussman.

It shows the S&P 500 Index value (left scale) against the percentage of US stocks trading above their 200-day moving average (right scale). Stocks in that category are usually said to be in long-term uptrends.

This chart reveals a major disconnect. Even as the index moves steadily higher, the number of bullishly trending stocks has dropped considerably. On the other hand, it’s still above 50%, so we can’t yet say most stocks are losing momentum.

This trend has brought something to my mind that I wrote about in 2006, when everyone was saying housing prices couldn’t go down. The reality was that every region I looked at had had a bear market in its housing prices, just not at the same time as the rest of the country.

Thus the housing price index for the country looked quite sustainable. But for those of us in Texas, scarred by memories of being able to buy homes at auction on the county courthouse steps in Houston, the concept of falling home prices was very real.

I work closely with managers who “deconstruct” the S&P 500 and invest in various sectors from time to time. Not quite sector rotation but a close cousin. A few years ago, I think everybody realized you didn’t want to be in energy stocks.

But the overall index kept steaming right along.

Join hundreds of thousands of other readers of Thoughts from the Frontline

Sharp macroeconomic analysis, big market calls, and shrewd predictions are all in a week’s work for visionary thinker and acclaimed financial expert John Mauldin. Since 2001, investors have turned to his Thoughts from the Frontline to be informed about what’s really going on in the economy. Join hundreds of thousands of readers, and get it free in your inbox every week.

John Mauldin Archive

© 2005-2017 http://www.MarketOracle.co.uk - 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

Catching a Falling Financial Knife