S2N Spotlight
What would you do if you were to receive a major inheritance this week? Where would you put your money?
There is a temptation to think that this time is different, that there is a new world order with regards to stocks. There isn’t; we have been here before. Fundamentals do count, even if you feel like a fool because the crypto bros are killing it, or because the property guys are killing it, or because the gold bugs are killing it, or because the stock bulls are killing it.
Let us begin with a traditional approach to valuation. Here we are looking at the S&P 500 PE ratio against an inflation-adjusted index. I get the data from this excellent site, with data going back to 1860. The current PE of 30 is more than double its mean or median. We are in very elevated territory. The 2020 pandemic caused a major short-term skew to the data.
I have written before about the Shiller PE ratio and why I think it is a better valuation methodology. As the ratio includes 10 years of earnings, it is less prone to one-off changes to earnings and is therefore more stable and reliable as a predictor. The problem when dealing with long-term indicators is that using them for timing can feel like a life sentence.
The current state of the Shiller PE is 38. With a mean of 17, a median of 16, and an all-time high of 44 in December 1999, we are in the “imminent” correction zone. Nobody can say with certainty that we won’t get more expensive or make new Shiller PE records. I say imminent because, in theory, we could have collapsed last week, today, tomorrow, or a year from now. We are in a spacetime where probability favours a return to normal.
Having said all the above, we are above 6,000, a number I said a few weeks ago was baked into the cake. Now that we have eaten the celebratory cake of the end of a gruelling election, its time to deal with the reality that comes after the party.
S2N Observations
For the Dow theorists out there, I cannot believe there are too many. We got confirmation on Friday with the Dow Transports confirming new all-time highs along with the Industrials. This negates the non-confirmation Dow Theory signal of a few months ago. Long life, Richard Russell, you legend.
The Commitment of Traders report released on Friday showed how large speculators of Bitcoin got it wrong being net short (see the blue line). I am not sure, but I don’t think Bitcoin on the CME trades on the weekend. I am sure there were many sleepless nights over the weekend wondering if they were going to be margin called Monday morning.
I have brought the Crypto table in the Performance section back due to the current crypto bull cycle. There were some crazy moves over the weekend. Talk about getting in over your skis; the market is discounting Trumps MAGA as if it is a done deal.
S2N Screener Alerts
The RTS Index, which is Russia’s 50 most valuable stocks, recorded a 5-day up streak on Friday. Given how tough the year has been for it, this is not something to get too excited about.
One of the few assets to register a 3 Z-Score was the Chinese Yuan, continuing its sharp weakness of late.
Performance Review
For those who are new to the letter, the shading is Z-Score adjusted so that only moves bigger than usual for the symbol are highlighted.