- 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 hussmanfunds.com 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
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,
Jeff
