Stock Market Extreme Over Valuation Warning
Stock-Markets / Stock Market Valuations Nov 21, 2011 - 12:36 PM GMTThis is one of our favourite charts, it depicts two different valuation measures. On X axis, we show the S&P500 annual dividend yield, and on the Y-axis the S&P Industrials' price to book value ratio. The box shows you normal valuation, at least as it was established in the 20th century. You can see that the dividend yield fluctuated from around 3% at tops in the market to 6 or 7 percent at bottoms in the market.
The most extreme readings came here, in 1928 and 1972, just slightly outside the box. And when the market got very over priced, as it did in 1928,1929, and right here in September 29, the market swing the other way and reached extremely low valuations in 1931, 1932, and the extreme low here in June 1932.
How far down do you think the market is going to go to make up for the valuation that it reached in March 2000?
This is so far out of the normal universe, we call it Pluto.
The market has been working its way, ever since that all time high, towards more reasonable valuations. But it's been a choppy ride; the rally into 2006-7 pushed it up to here, and the rally into 2011 pushed valuations to here. You can see that the dividend yield in the S&P was only 2% in April 2011, and the price to book value in April was around 5.5 times, way higher than the normal level between 1 and 2 times that we see through most of the 20th century. I think, because of this overvaluations is so extreme, we're going to see ........ The is an excerpt from Elliott Wave Internationals FREE 14 page report “The Most Important Investment Report You’ll Read for 2012” that you can download now.
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