S&P 500 over-valued and showing signs of weaknessIf you aren't going to speak your mind, why say anything?
Here is the situation;
The SPX has a Shiller Price to Equity Ratio of 37.6.
There are only two other times in the last 100 years that valuations were higher.
1. Back in 2021 valuations reached 38.6 before a ~25% correction.
2. During the 2000 dot com mania it got to 44.2. After the bubble broke, it was over 12 years before the S&P 500 exceeded its previous Dec 1999 high.
3. The average PE ratio for the previous 20 years is 26.7, this would imply the market is around 30% over-valued (Reversion to the mean would put the market at the 4100 level). That is unless we have reached a new investing paradigm, where the actual income generated by a business is uncorrelated to the value of the business. But, of course we haven't.
4. Safe investments like the 10 year treasury (4.63%) exceed the income generated by owning the S&P 500 (1.3%). If you also get capital gains, it is acceptable. But, when the market delivers losses, the safety of Treasuries will start to look really good.
Even very optimistic people would admit that we are closer to the top, than the bottom of the market.
A discount is inbound. Who knows how much it will be, I am picking prices will over-shoot. Time will tell.
Oh year, bearish divergence. Which, can be a very strong indication of reducing momentum, and a change of market direction.
