This is a fun correlation. By just looking at the EPS revisions (which is still negative), you can see that the stock market has outrun its pace and is due for a correction.
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| Chart 1: EPS revisions Vs. S&P |
Showing posts with label eps. Show all posts
Showing posts with label eps. Show all posts
Tuesday, 26 February 2013
There are several indicators today, marking a major top in the stock market. One of those indicators is the overvaluation in the stock market according to the "Warren Buffett Valuation" of the total U.S. stock market index as compared to U.S. GNP. We found out that stock markets are overvalued today, because the total U.S. stock market index is at 100% of U.S. GNP. Normally we see that the total U.S. stock market index is at 80% of GNP. We just recently had news that U.S. GDP was negative and I wrote about it here. When GDP declines, it inherently means that the stock market must decline, taking into account the Warren Buffett Valuation theory.
Investors are much too bullish on stocks at this moment and we can see that in the Dow-Gold ratio, which is hitting a ratio of 9 to 1 as we speak.
I believe though, we shouldn't be so complacent about stocks. After all, the P/E ratio of the Dow Industrials stands at 15.3 right now, while in the 70's, the P/E ratio was on average at 10, which is much lower than 15.3. The question is: "Do we expect higher or lower earnings in the future?". I believe the earnings are going to get worse in the future. One way to measure this is to look at the Citigroup Economic Surprise Index (CESI). This index is defined as weighted historical standard deviations of data “surprises”. In human language it means that if the index turns negative, the chance of an "unexpected" downward revision goes up. You will hear more bad news out of the media. And what do you know, the CESI did turn negative in the previous month. So you can expect more bad news coming. Historically, when the CESI goes down, the stock market goes down a few months later as you can see on chart 1.
To read more evidence on a top in equities, go here.
Investors are much too bullish on stocks at this moment and we can see that in the Dow-Gold ratio, which is hitting a ratio of 9 to 1 as we speak.
I believe though, we shouldn't be so complacent about stocks. After all, the P/E ratio of the Dow Industrials stands at 15.3 right now, while in the 70's, the P/E ratio was on average at 10, which is much lower than 15.3. The question is: "Do we expect higher or lower earnings in the future?". I believe the earnings are going to get worse in the future. One way to measure this is to look at the Citigroup Economic Surprise Index (CESI). This index is defined as weighted historical standard deviations of data “surprises”. In human language it means that if the index turns negative, the chance of an "unexpected" downward revision goes up. You will hear more bad news out of the media. And what do you know, the CESI did turn negative in the previous month. So you can expect more bad news coming. Historically, when the CESI goes down, the stock market goes down a few months later as you can see on chart 1.
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| Chart 1: Citigroup Surprise Index Vs. S&P |
Thursday, 22 November 2012
I found a very good macroeconomic site named Eureka Report (Kohler's Graphs) which basically monitors global economic trends. I couldn't resist to show one of them here.
As I pointed before, equities have outperformed many other assets the last months and this can also be seen on Chart 1. There is a correlation between equity prices and the earnings per share revisions. The last couple of months we saw a decoupling between the two.
It is my prediction that global equities will therefore continue to underperform other assets in the coming months.
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| Chart 1: Equities Vs. EPS (Kohler's Graphs) |
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