Primary and secondary trends for stocks, gold, silver and their miners unchanged.
The lull continues. So, once again, I’ll focus on
issues pertaining to investing with a Dow Theory focus. Today I will delve into
secular trends, valuations and what to do about them.
This blogger truly yours has been skeptical as to
trying to determine the existence of a secular bull/bear market based on valuations.
You can read my most recent post on this matter here.
Well, Matt O’Brien has recently written on the
Washington Post that the valuation issue is highly elusive and that there might
be good reasons for the seeming overvaluation of stocks (which has been with us
for at least the last 25 years). O’Brien quotes a couple of pearls of Eddy Elfenbein, of "Crossing Wall Street" which should prompt us to forget valuations (as there is no proper
yardstick to define “valuation” to begin with, or, if you prefer, your
yardstick changes with time, so any measure or comparison you make is meaningless) as a good
indicator to time our investments in the stock market.
Here you have the quotes:
"The only problem is
they’ve been getting expensive for awhile low. “According to CAPE,” Crossing
Wall Street’s Eddy Elfenbein told me, “stocks have been valued above average
for most of the last 25 years.” Part of
that is accounting standards are different than they used to be, so valuations
are too—they’re higher. Another part is that interest rates having been falling
the last three decades, and, all else equal, lower rates should mean higher
stock valuations. And the last part is that CAPE overweights what happened
before to what’s happening now. Think about it like this. Today’s 27.2 CAPE
ratio is so high, in part, because earnings were so bad during the financial
crisis. But it’s a little funny to say that a historically crummy economy seven
years ago means stocks are overvalued now.
Another way to look at this is to
just consider last year’s earnings. Now this has the opposite problem of only
weighting what’s happening now. So if earnings are negligible or negative, like
they were in 2008, this will say that stocks are super expensive when they’re
actually super cheap. But as long as we keep that in mind, this still helps us
look at stocks from a slightly different angle. And it tells us that, with a PE
ratio of 19.7, the S&P 500 isn’t a bargain, but it isn’t exorbitant either.
In other words, it’s a little high, but compared to the last 25 years, not
crazily so. (That’d be the tech bubble). Besides,
it’s a “misperception that the market falls due to valuation,” Elfenbeing says,
when “more often stocks fall with lower fundamentals instead of prices soaring
beyond fundamentals.”
(emphasis in original)
My Dow Theorist comment: So, forget about valuations
if you want to catch the next downturn of the market, you better look for clues
elsewhere and here comes the Dow Theory in handy. The best time frame not to be
deluded by valuations is the cyclical bull/bear markets (average duration 1-2
years) which is long term enough not to be a day trader and to avoid noise, and
short term enough not to be in the secular timeframe which requires valuation
and fundamental considerations (which are subjective and inaccurate per se) in order to decide whether to be
“in” or “out” of the market. Hone your Dow Theory skills, become proficient at
it, and relax. You’ll be able to know when to be “in” and “out” without
resorting to fancy valuation methods, which are close to useless (as they are
inherently flawed to begin with) to most of us mere mortals.
Sincerely,
The Dow Theorist.
No comments:
Post a Comment