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Sunday, August 6, 2017


There are many ways to measure the current value of the U.S. stock market in comparison to its historic values.  By most valuation-related metrics, the stock market is now (with the S&P 500 at 2,477) substantially overvalued.  Some of my favorite valuation measures are:
  • Total Market Capitalization-to-GDP Ratio -- this has traditionally been Warren Buffet's favorite indicator.  Detailed explanation here: Link   Using this valuation method, the stock market is currently more than 30% overvalued.
  • Price-to-Sales Ratio -- measures total corporate market capitalization as a percentage of total corporate annual sales revenue.  The most recent 'Weekly Market Comment' by John Hussman on their site includes this indicator (along with several others).  Please read this article carefully -- it provides some terrific insights, including an especially lucid explanation of the Federal Reserve Bank's Balance Sheet: Link  By this P/S Ratio method, the stock market is currently more than 40% overvalued.
  • Price-to-Earnings Ratio -- this is the single valuation metric most often used by analysts and investors.  As shown below, the Covered Calls Advisor tracks the current P/E Ratio relative to Annual Inflation as a measure of current market value.  By this P/E relative to Inflation method, the stock market is currently 17% overvalued.

Clearly, each of these Valuation-related metrics provide a 'Bearish' market outlook.  However, remember that Valuation is only one factor (albeit a very important one) in the Covered Calls Advisor's 'Overall Market Meter'.  As shown in the right sidebar, the current 'Overall Market Meter' sentiment is 'Neutral'.  In addition to Valuation, other important factors include:
  • Macroeconomic -- currently Slightly to Moderately Bullish
  • Momentum -- currently Moderately Bullish
  • Future Growth -- currently Neutral to Slightly Bullish
So, the positive macro, momentum, and growth factors are a counterbalance to the bearish valuation indicators.

Recently, you might have noticed that the Covered Calls Advisor has established conservative, in-the-money Covered Calls positions, which is a direct result of the current high market value relative to its historic average.  The S&P 500 is now at 2,477 and is extremely overvalued, so it is prudent to "Use Extreme Caution" with our investments.

Remember this similar sentiment from these three all-time great investors:
  • John Templeton -- "The time of maximum pessimism is the best time to buy and the time of maximum optimism is the best time to sell"
  • Warren Buffett -- "We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful"; and 
  • Benjamin Graham -- "I have every confidence in the threefold merit of this general method based on (a) sound logic, (b) simplicity of application, and (c) an excellent supporting record. At bottom it is a technique by which true investors can exploit the recurrent excessive optimism and excessive apprehension of the speculative public."

Please click on the 'Comments' link below with any thoughts/questions you wish to share.

Regards and Godspeed,


  1. Jeff and All,

    We are one hundred percent in agreement with what you have penned. I do not think it wise to trade on feelings or emotions but I admit, I have had this ominous "feeling" that the market is being pushed (manipulated?) higher as a trap to bring into the market the last of the sideline money. Those mysterious beings pulling the levers, I have no idea exactly who, perhaps the algo-traders and those behind high-frequency trading at large firms. Would a market crash serve the political agenda of a select group, yes, even that idea has crossed my mind. Could we rocket much higher and simply have a mild correction, sure it is a possibility I would like to see. Somehow, someday I think there is a "real" correction coming our way.

    Shortly after the beginning of 2017 we began to build up cash in our covered call portfolio. I have yet to calculate after last week's close, very busy weekend here in the Philippines. I think we are at 40% cash right about now. Our plan for the CC portfolio is to continue to equal or slightly excede the SS check amount, anything more at this time will be considered pure greed and could land us in trouble. We plan to save the cash for bargain hunting or bearish trades.

    Jeff, as you so correctly highlight, there is this force called gravity and all things in this life respond to it, even the stock market.

    Good trading to all,
    Maco and Jack W

    1. Nice to hear from you! Hope life in the Philippines continues to be great for you.


  2. No offense but I really think the traditional gauge indicators such as CG, PS or PE don't fit for this kind of central bank driven market. As long as CB keep printing money the market can only go one direction - UP

  3. Although it has gone largely unnoticed, the Fed has already announced that additional quantitative easing is over. In fact, we are now beginning a gradual transition from easing to tightening. Here is a small excerpt from the Hussman article link included in the 'Price-to-Sales Ratio' section of this post explaining this: "Recall that the Federal Reserve implements quantitative easing by buying existing government securities and creating base money (bank reserves and currency) to pay for them. Once the base money is created, it remains in the form of base money until it is retired. It can never “turn into” something else, nor does it “go into” any other market in the hands of a buyer without immediately coming right back out in the hands of a seller. So while base money can go everywhere as part of various transactions, it ultimately goes nowhere in the sense that it remains base money at every moment in time. The only way to eliminate the base money is to retire it. To do so, the Federal Reserve plans to let the bonds in its portfolio mature without reinvesting the proceeds, beginning later this year."