Key stock indices are the main barometers of the market’s health. The key stock indices are the ones that most investors pay attention to when trying to understand where the market stands. For the U.S., the key stock indices include the Dow Jones Industrial Average and the S&P 500. But the key stock indices can also include sub-groups that are crucial to a healthy market, such as the Dow Jones Transportation Index. In every country, there are key stock indices that one can follow to better understand the health of that country’s market.
Investors poured $4.3 billion into the SPDR S&P 500 (NYSE/SPY) last week, an exchange-traded fund (ETF) that tracks the S&P 500. For the week, ETFs tracking U.S. equities witnessed the most inflows in the last four weeks. (Source: Reuters, July 17, 2014.)
And as investors continue to inject vast sums of money into the stocks, stock valuations are at historical extremes. When I want to see how expensive the stock market is getting, I look at the S&P 500 Shiller P/E multiple (the value of stocks compared to what they earn adjusted for inflation)…and it’s screaming overvalued.
In July, the S&P 500 Shiller P/E stood at 25.96. That means that for every $1.00 a company makes, investors are willing to pay $25.96. The stock market has reached this P/E valuation (25.96) only seven percent of the time since 1881.
The number suggests the stock market is overvalued by 57%, according to its historical average of 16.55. (Source: Yale University web site, last accessed July 18, 2014.) The last time the S&P 500 Shiller P/E was above the current level was in October of 2007—just before one of the worst market sell-offs in history.
But this isn’t the only indicator suggesting the stock market is overvalued.
Another indicator of stock market valuation I look at is called the market capitalization-to-GDP multiple. Very simply put, this indicator is a gauge of the value of the stock market compared to the overall economy. It has been a good predictor of where key stock indices will head.
At the end of the first quarter of this year, the Wilshire 5000 Full Cap Price Index … Read More
There are two important charts I want my readers to see this morning.
The first is a chart that is an indirect measure of demand in the global economy. Right now, the Baltic Dry Index (BDI) sits at its lowest level of the year. Since the beginning of 2014, the BDI has fallen 60%.
The BDI measures the cost of moving major raw materials by sea in the global economy. The thinking is that the lower the cost to move goods by ship, the lesser the amount of goods to move (a strict demand/supply price situation).
Chart courtesy of www.StockCharts.com
What’s happening with the steep drop in the BDI can be seen in a corresponding slowdown in the global economy.
Germany, the fourth-biggest economy in the world, saw its industrial production decline by 1.8% in May after falling 0.3% in April. (Source: Destatis, July 7, 2014.)
Great Britain, the sixth-biggest market in the global economy, saw its production decline 0.7% in May, while its manufacturing decreased 1.3%. (Source: Office for National Statistics, July 8, 2014.)
France, the fifth-biggest economy, reports no gross domestic product (GDP) growth in the country in the first quarter of 2014. (Source: MarketWatch, July 8, 2014.)
In 2014, the Chinese economy will grow at its slowest pace in years. In Japan, the Bank of Japan (its equivalent to our Federal Reserve) has announced it will start buying exchange-traded funds (in specific, the Nikkei 400 ETF) to “boost the impact of (its) unprecedented easing.” (Source: “Bank of Japan Seen Buying Nikkei 400 ETF,” Financial Post, July 10, 2014.) Yes, the central bank of Japan is buying … Read More
There’s one long-term investing adage that has shown a great amount of success over the years: buy when everyone is fearful and sell when optimism is over the top. This theory worked extremely well when key stock indices fell to their lowest levels. It worked in 1987, in 2000, and then in 2009—three of the greatest times to buy stocks in history.
With this in mind, take a look at the long-term chart of the Chicago Board Options Exchange (CBOE) Volatility Index (VIX) below. This index is often referred to as the “fear index” for key stock indices, since it is a gauge/measure of how fearful investors are about the stock market declining. The higher the index goes, the more fear in the market; the lower the index goes, the more optimism in the market.
Chart courtesy of www.StockCharts.com
The VIX clearly shows investor concern about key stock indices declining, sitting close to the same point it was at back in 2007—just a few months before stocks started to collapse.
Aside from the VIX flashing red…there are two other key stock market indicators in the trouble zone.
According to the CNBC Market Insider Activity, insiders of companies on the key stock indices continue to sell billions of dollars worth of stock monthly. The sell-to-buy ratio—that is how many shares they sold compared to how many they bought—was 10 to 1 in May, meaning they sold 10 shares for every one share bought. (Source: CNBC Market Insider Activity, last accessed May 27, 2014.) Corporate insiders have been selling their shares at an accelerated pace for some time now.
And corporate earnings … Read More
If you want to see what happens when irrationality over a stock comes to an end, check out this chart of Amazon.com, Inc. (NASDAQ/AMZN).
In 2013, Amazon.com stock went up 63%. So far this year, the stock has collapsed 25% as investors realize converting growing revenues into corporate earnings for Internet-based stocks on key stock indices is not an easy task.
Mind you, Amazon.com isn’t the only tech stock on the key stock indices that is getting hit. Other tech stocks are under pressure, too, as evidenced by the NASDAQ being down for the year.
But despite stocks being overvalued—and some very big-name Internet stocks on the key stock indices coming down in price—investors continue to buy.
In the first three months of this year, the long-term stock mutual funds saw inflows of $54.13 billion. (Source: “Historical Flow Data,” Investment Company Institute web site, last accessed May 12, 2014.) April’s monthly figures aren’t available just yet, but from weekly data, we estimate another $10.0 billion worth of long-term stock mutual funds were bought in April.
And they are buying stocks with borrowed money. As of March, margin debt on the New York Stock Exchange (NYSE) stood at a record $450.2 billion, up 19% from March of 2013. (Source: New York Stock Exchange web site, last accessed May 12, 2014.)
But this is what I find most interesting…
Even though investors have borrowed more money than any other time in history to buy stocks, most key stock indices are flat for the year. Among the key stock indices, the Dow Jones Industrial Average is up marginally, while … Read More
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