Gold Down Trend May Be Resuming, SPX 500 Eyes Support Sub-2000 – DailyFX

Talking Points:

  • US Dollar Awaits Clues in Narrow Consolidation Range
  • S&P 500 Down Move Slows Ahead of Support Sub-2000
  • Gold Resuming Down Trend, Crude Oil Selloff Continues

Can’t access the Dow Jones FXCM US Dollar Index? Try the USD basket on Mirror Trader. **

US DOLLAR TECHNICAL ANALYSIS – Prices moved lower as expected after prices put in a bearish Evening Star candlestick pattern. A daily close below the 23.6% Fibonacci retracementat 11379 exposes the 38.2% level at 11291. Alternatively, a turn above the 14.6% Fib at 11434 opens the door for a challenge of the December 8 high at 11522.

Gold Down Trend May Be Resuming, SPX 500 Eyes Support Sub-2000

Daily Chart – Created Using FXCM Marketscope

** The Dow Jones FXCM US Dollar Index and the Mirror Trader USD basket are not the same product.

S&P 500 TECHNICAL ANALYSIS – Prices turned lower as expected. Sellers now aim to challenge the 38.2% Fibonacci retracement at 1980.00, with a break below that exposing the 50% level at 1949.30. Alternatively, a reversal above the 2018.10-22.10areamarked by the 23.6%Fib and theSeptember 19 hightargets the 2041.50-49.10 zone (14.6% Fib, December 1 low).

Gold Down Trend May Be Resuming, SPX 500 Eyes Support Sub-2000

Daily Chart – Created Using FXCM Marketscope

GOLD TECHNICAL ANALYSIS – Prices turned lower anew, with a break below the 23.6% Fibonacci expansion at 1187.39 exposing the 38.2% level at 1156.00. Alternatively, a reversal above the 14.6% Fib at 1206.75 targets the December 9 high at 1238.13.

Gold Down Trend May Be Resuming, SPX 500 Eyes Support Sub-2000

Daily Chart – Created Using FXCM Marketscope

CRUDE OIL TECHNICAL ANALYSIS – Prices are aiming to extend the latest losing streak for a fifth consecutive day. A break below the 100% Fibonacci expansion at 58.93 exposes the 123.6% level at 55.61. Alternatively, a reversal above the 76.4% Fib at 62.25 targets the 61.8% expansion at 64.30.

Gold Down Trend May Be Resuming, SPX 500 Eyes Support Sub-2000

Daily Chart – Created Using FXCM Marketscope

— Written by Ilya Spivak, Currency Strategist for DailyFX.com

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Crude Oil Drop Stalls Ahead of $60 Mark, SPX 500 Hits 7-Week Low – DailyFX

Talking Points:

  • US Dollar Downswing May Resume After Consolidation
  • S&P 500 Punctures 2000 as Prices Hit Seven-Week Low
  • Crude Oil Selloff Pauses to Digest Ahead of $60/Barrel

Can’t access the Dow Jones FXCM US Dollar Index? Try the USD basket on Mirror Trader. **

US DOLLAR TECHNICAL ANALYSIS – Prices turned lower from a five-year high as expected after completing a bearish Evening Star candlestick pattern. Near-term support is at 11379, the 23.6% Fibonacci retracement, with a break below that on a daily closing basis exposing the 38.2% level at 11291. Alternatively, a reversal above the 14.6% Fib at 11434 clears the way for a test December 8 high at 11522.

Crude Oil Drop Stalls Ahead of $60 Mark, SPX 500 Hits 7-Week Low

Daily Chart – Created Using FXCM Marketscope

** The Dow Jones FXCM US Dollar Index and the Mirror Trader USD basket are not the same product.

S&P 500 TECHNICAL ANALYSIS – Prices turned lower as expected, plunging to the lowest level in seven weeks. Sellers now aim to challenge the 38.2% Fibonacci retracement at 1980.00, with a break below that exposing the 50% level at 1949.30. Alternatively, a reversal above the 2018.10-22.10areamarked by the 23.6%Fib and theSeptember 19 hightargets the 2041.50-49.10 zone (14.6% Fib, December 1 low).

Crude Oil Drop Stalls Ahead of $60 Mark, SPX 500 Hits 7-Week Low

Daily Chart – Created Using FXCM Marketscope

GOLD TECHNICAL ANALYSIS – Prices paused to consolidate after clearing resistance at a falling trend line set from early July. A break above the 50% Fibonacci retracement at 1237.59 on a daily closing basis exposes the 61.8% level at 1262.96. Alternatively, a turn back below the intersection of the trend line and the 38.2% Fib at 1212.23 targets the 23.6% retracement at 1180.84.

Crude Oil Drop Stalls Ahead of $60 Mark, SPX 500 Hits 7-Week Low

Daily Chart – Created Using FXCM Marketscope

CRUDE OIL TECHNICAL ANALYSIS – Prices have paused to digest losses after breaking below the 76.4% Fibonacci expansion at 62.25. A reversal back above this barrier exposes the 61.8% level at 64.30. Alternatively, a renewed push downward sees support at 58.93 – the 100% Fib – with a daily close below that targeting the 123.6% expansion at 55.61.

Crude Oil Drop Stalls Ahead of $60 Mark, SPX 500 Hits 7-Week Low

Daily Chart – Created Using FXCM Marketscope

— Written by Ilya Spivak, Currency Strategist for DailyFX.com

To receive Ilya’s analysis directly via email, please SIGN UP HERE

Contact and follow Ilya on Twitter: @IlyaSpivak

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SPX Topping Valuations – Investing.com

The prevailing valuations in the lofty US stock markets are increasingly becoming a bone of contention. Wall Street calmly asserts stocks are fairly valued or even cheap, since it has a huge vested interest in keeping people fully-invested. But a growing chorus of dissenters is disputing that idyllic notion, warning that stock valuations are very high and portend great downside risk. Indeed, topping valuations abound.

Since investing is all about buying low and selling high, the price paid for any investment is everything. Buy good companies at cheap prices, and you’ll multiply your wealth over time. But buying those very same good companies at expensive prices radically stunts future gains. While cheap investments have great potential to soar as traders recognize their inherent value, expensive ones have already exhausted their upside.

And it’s valuations, not absolute stock prices, that define cheap and expensive. Valuations are where stock prices are trading relative to their underlying corporate earnings streams. The less investors pay in terms of stock price for each dollar of profits, the greater their ultimate returns. Valuations are most often expressed in price-to-earnings-ratio terms, with stock prices divided by underlying corporate earnings per share.

This concept is so easy to understand, yet the vast majority of investors ignore it. Imagine purchasing a house for a rental property that has expected annual rental income of $30k. How much would you be willing to pay for it? If you can get it for $210k, 7x earnings, it will pay for itself in just 7 years. That’s a great deal. But if that same house is priced at $630k, 21x, it will take far too long just to recoup the initial cost.

The stock markets work the same way, with each dollar of profits completely fungible. And the US stock markets have a century-and-a-quarter average P/E ratio of 14x earnings. That’s fair value for the stock markets as a whole, paying $14 in stock price for each $1 of underlying corporate earnings. This makes a lot of sense, as stock markets exist to “lend” capital from those with surpluses of it to others running deficits.

The reciprocal of 14x earnings is 7.1%. That’s a fair rate of return for those with excess savings they want to invest, and a fair price to pay for those who want access to that scarce capital. 14x facilitates mutually-beneficial transactions for each side of the capital trade, so it’s right where stock valuations have naturally gravitated towards over the very long term. Cheap and expensive are defined from that baseline.

Half fair value, or 7x earnings, is very cheap historically. Buying good companies’ stocks trading at 7x earnings is a virtual guarantee of massive wealth-multiplying future gains. Conversely double fair value, 28x, is exceedingly-dangerous bubble territory. Buying the same good companies’ stocks at 28x dooms invested capital to many years of lackluster gains at best, and catastrophic losses exceeding 50% at worst.

There’s nothing more important for investors to understand than general-stock-market valuations. They move in great third-of-a-century cycles I call Long Valuation Waves. These are divided into secular bulls and secular bears that each last about 17 years. Valuations start out cheap near 7x, gradually expand to or through 28x in the first-half secular bulls, and then consolidate back to 7x in the second-half secular bears.

Unfortunately the US stock markets remain mired deep in the valuation-contracting secular-bear phase of their LVW today despite their epic cyclical bull of recent years. How can that be true when the US stock markets have more than tripled since early 2009? The flagship S&P 500, despite its massive gains, still remains below its real inflation-adjusted peak from the end of the last secular bull way back in March 2000!

The last cyclical bull peaked in October 2007, and ominously the US stock markets are trading at much-higher valuations today than they were back then. This first chart looks at general-stock valuations as seen through the lens of the benchmark S&P 500, SPX. Our methodology is simple and conservative, and very easy to replicate. At each month-end, we record some key data from all 500 SPX component companies.

Each individual stock price is divided by that company’s latest four quarters of accounting profits per share as reported to the SEC, yielding individual P/E ratios for all 500 SPX components. This is classic trailing-twelve-month methodology, involving hard historical data and no guesswork on future profits. Then all 500 of these P/Es are averaged, both simply and also weighted by individual companies’ market capitalizations.

Here’s the results since the topping of the last cyclical bull, with the popular SPDR S&P 500 ETF (SPY) superimposed on top for price reference. Contrary to Wall Street’s endless claims that the stock markets aren’t expensive today, prevailing valuations are actually way up at dangerous bull-slaying levels. The SPX and therefore US stock markets are trading at topping valuations today, which is a super-bearish omen.

SPX Valuation And SPY

SPX Valuation And SPY

As November waned, the 500 elite component companies that comprise the S&P 500 benchmark index for US stock markets were trading at a simple-average trailing price-to-earnings ratio of 24.9x! In other words, investors buying SPY shares today would have to wait a soul-crushing 25 years merely for underlying corporate profits at current levels to recoup the price they are paying. That’s before real gains start accruing.

And even if the 500 individual trailing-twelve-month P/Es are weighted by their respective companies’ market capitalizations, the valuations don’t look much better at 22.7x. Remember for the last 125 years or so, the US stock markets averaged 14x earnings. 21x was the warning level that signaled expensive markets likely to drift or slide, while 28x screamed of dangerous bubbles. We’re right up near that realm today.

The last cyclical bull cresting in October 2007 died at SPX simple and MCWA P/Es of just 23.1x and 21.3x, about 8% and 7% lower than the current lofty valuations. Stock-market valuations can only be bid so high before buyers are exhausted, paving the way for subsequent cyclical bear markets that cut stock prices in half to restore value. Prevailing valuations are dragged back down below historical fair value.

Indeed by early 2009 when that last bear bottomed, valuations were again on the cheap side near 12x earnings. So value-oriented institutional buyers returned, snatching up the widespread fundamental bargains. And with corporate earnings still beaten down by the economic and psychological aftermath from 2008’s once-in-a-century stock panic, valuations rocketed as stocks soared while profits couldn’t keep pace.

But by late 2009, earnings were stabilizing and growing again so the price-to-earnings-ratio multiple expansion stalled. Between mid-2009 and late 2012, the valuations of the SPX components weighted by their market caps were stable around 19x trailing earnings. The rising stock prices in that cyclical bull were nicely mirrored by climbing underlying corporate profits, so the bull-market gains in that span were righteous.

But heading into late 2012, the US stock markets were looking toppy on a variety of key fundamental, technical, and sentimental fronts. So the Fed decided to goose the flagging stock markets right before those key 2012 elections. It launched a wildly-unprecedented open-ended quantitative-easing campaign, conjuring up vast amounts of new money out of thin air to use to monetize debt including US Treasuries.

QE3’s deluge of money printing along with the associated Fed jawboning radically distorted the global financial markets. American stock traders came to believe the Fed was effectively backstopping the US stock markets, that it would quickly ramp up QE monetary inflation to arrest any significant stock-market slide. So with all material downside risk apparently mitigated, investors flooded into the stock markets in droves.

So they soared. But as this chart damningly reveals, nearly the entire SPX surge driven by QE3 over the past couple years was due to multiple expansion! Stock prices surged higher, but the underlying corporate earnings couldn’t keep pace. With the Ps of P/E ratios climbing much faster than the Es, general-stock valuations gradually rose to today’s dangerously-high levels. Earnings didn’t justify that SPX surge.

Without any fundamental foundation, everything between roughly 1500 to 2100 on the S&P 500 is merely hot air injected by the Fed. That means the overextended and expensive US stock markets face massive downside risk today. This is even more apparent when considering where SPY would be priced if P/Es based on current trailing-twelve-month earnings merely mean reverted to 14x fair value.

The white line above shows where SPY would be trading at fair value, and it was way down near $116 when November ended. That was a whopping 44% below where SPY was actually trading! And even that was high in historical context. Note above that the long sideways trend in fair-value SPY levels is between about $90 to just over $100. SPY wasn’t able to break out of that until just in recent months.

With years of SPY (and therefore SPX) precedent within that consolidation fair-value trend, odds are the recent breakout not supported by earnings growth won’t last. At some point very soon, the prevailing lofty stock-market valuations are going to mean revert dramatically lower. And given our current position in those great third-of-a-century Long Valuation Wave cycles, that overdue multiple contraction should be massive.

This next chart zooms back out to show the entire secular bear in SPX terms since 2000. Secular bears arise because stocks get wildly-overvalued by the ends of preceding secular bulls. The mission of these 17-year bears is to gradually whittle stock valuations back down, from super-overvalued levels above the 28x bubble threshold to ultimately deeply-undervalued 7x levels near the ends of those secular bears.

This is accomplished not through a sharp stock-price decline, but a grueling 17-year sideways grind. That gives underlying corporate earnings time to gradually grow into the lofty stock prices seen at the ends of secular bulls. And that’s exactly what’s happened in the US stock markets since early 2000. All the record highs in the SPX are a Fed-conjured illusion, as no new records have been seen in real terms!

In today’s dollars, the last S&P 500 secular bull crested well above 2125 in March 2000. The best level we’ve seen in the Fed’s QE3 levitation is 2075, still well under that peak a whopping 14.7 years later. So the secular-bear sideways grind is very real. And while 14.7 years is a long time, it is considerably less than the full secular-bear duration of 17 years completing Long Valuation Waves. The secular bear still lives!

And that means general-stock valuations are still headed back down near 7x earnings. This long trend of multiple contraction is readily evident in this chart, as evidenced by the big dashed line. At today’s stage in secular bears, prevailing stock-market valuations should be back down around 10x or 11x the underlying corporate profits! And that will gradually trend down towards 7x before the 17 years are completed.

SPX Valuations

SPX Valuations

The SPX components’ trailing-twelve-month P/E ratios were right on secular-bear trend in late 2012 before the Fed decided to goose the stock markets with QE3’s vast debt monetizations. And ever since then they have catapulted farther and farther away. This has created enormous risk because nothing, not even powerful central banks, has ever been able to prematurely kill secular bears before their work is done.

So the next cyclical bear market, which is way overdue given today’s extreme overvaluations and far-overextended cyclical bull, is set to be particularly nasty since prevailing valuations were manipulated so far over where they should be at this point in the long-term stock-market cycles. Normal secular-bear activity sees internal cyclical bulls double stocks after cyclical bears cut them in half. This latest bull tripled them!

And there will be a steep price to pay, stock markets always see reckonings after any exceptional extreme. They mean revert dramatically to not only unwind the unnatural extreme, but almost always to overshoot in the opposite direction before they stabilize. Investors today need to be aware of the vast downside risks in these super-overvalued stock-market levels spawned by Fed manipulations, not profits growth.

Wall Street loathes this prudent contrarian perspective, as it is bad for business. Professional money managers are always bullish because they get paid a percentage of assets under management. So their financial incentives to keep people fully-invested no matter what, no matter how expensive and risky the stock markets happen to be, are vast beyond belief. So they ignore overvaluations or rationalize them away.

The method of choice for lulling naive investors into complacency is to substitute forward P/E ratios for the classic trailing ones. Rather than using the past four quarters’ hard actual earnings data, analysts estimate the next four quarters’ future earnings. Of course this task is impossible given all the uncertainty, and analysts are not only always wrong on future earnings they are endlessly far too optimistic on them.

So when you hear some prominent money manager or analyst or economist declare that today’s stock markets are fairly valued, realize they aren’t talking about classic trailing-twelve-month P/E ratios. What they are really saying is if corporate earnings surge dramatically in the coming year, today’s stock prices justify those future earnings. Forward earnings are a farce, a confidence man’s tool used to fleece sheep.

The Fed’s QE3 money printing catapulted stock prices into this perverse fantasyland with no earnings foundation, but QE3 is now over. The Fed recently killed QE3’s new bond buying, and thanks to the sweeping Republican Congressional victory last month the Fed’s hands are tied in launching any QE4. For very good reasons, Republican lawmakers have long hated this Fed’s easy-money inflationary schemes.

They’re going to pressure the Fed politically to not only unwind its massive QE-inflated balance sheet, but to end its ludicrously unfair zero-interest-rate policy that has robbed from savers to subsidize debtors continuously since late 2008. And rising rates have hugely bearish implications for prevailing stock-market valuations and absolute price levels. Overvalued stocks and rate hikes are truly a recipe for disaster.

One of the reasons QE3 pushed stock prices to such lofty extremes was the Fed squeezing the rates of return in the bond markets so hard. As bond yields were forced down to next to nothing, well below money-supply inflation rates, investors fled to stocks catapulting them higher. As interest rates inevitably start to normalize, some of the bond investors who didn’t want to park capital in risky stocks are going to sell.

In addition, one of the biggest sources of stock-share demand in the past couple years of the Fed’s QE3 levitation was the gargantuan corporate buybacks. In order to keep their earnings per share growing in Obama’s stagnant economic environment, companies spent hundreds of billions repurchasing their own shares to reduce their float which increases EPS. They paid for these not through profits, but borrowing.

So as the Fed’s zero-interest-rate policy ends, the ability of companies to borrow money at artificially-cheap next-to-nothing rates will vanish. So will the stock buybacks, which incidentally are also a major topping sign. This will not only greatly reduce overall stock-share demand, but slash the fancifully-high earnings-per-share growth analysts are hoping for in the coming years. So valuations will look even higher!

In light of all this and even more very bearish developments on the fundamental, technical, and sentimental fronts, today’s stock-market topping valuations are extraordinarily risky and dangerous for investors. Bulls are always followed by bears, and this latest bull specimen was abnormally long and large thanks to the Fed’s manipulations. So when the stock markets inevitably swing the other way, it’s going to get ugly.

Investors have rarely needed a prudent contrarian source of market intelligence as much as they do today. Massive stock-market changes are coming as stock prices and valuations mean revert far lower, and the investors trapped unaware in this are going to lose fortunes. Merely-average cyclical bears cut stock prices in half, and after the epic excesses of recent years the next cyclical bear will likely be exceptional.

At Zeal we’ve been walking the contrarian walk for well over a decade, earning fortunes for our long-term subscribers. We buy stocks cheap when they are deeply out of favor, then later sell them high when everyone else comes around and gets excited about a sector. It’s absolutely essential to cultivate contrarian thought and trading philosophies with the stock markets so expensive and overdue for a major selloff.

We’ve long published acclaimed weekly and monthly contrarian newsletters for speculators and investors. They draw on our decades of hard-won experience, knowledge, wisdom, and ongoing research to explain what’s going on in the markets, why, and how to trade them with specific stocks. With massive changes in these lofty overvalued stock markets imminent, subscribe today and learn how to protect your future!

The bottom line is the US stock markets are dangerously overvalued today, with trailing P/E ratios well above bull-slaying levels. After the last time this happened, stock prices were more than cut in half. And once again another cyclical bear is overdue, and it’s likely to be a doozy after such an incredible and artificial stock-market surge fomented by Fed manipulations. Buying stocks high has rarely been riskier.

And the same Fed that created the conditions to spark such rampant overvaluations has been sidelined politically. So once the next serious stock-market selloff inevitably gets underway, there will be no Fed backstop to entice euphoric investors to rush back in to buy expensive stocks. Merely to return to fair value based on today’s corporate earnings, not even overshoot, stock-market levels will have to fall dramatically.

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Gold Breaks 5-Month Down Trend, SPX 500 Double Top Firming – DailyFX

Talking Points:

  • US Dollar Chart Setup Points to Downward Correction Ahead
  • S&P 500 May Have Formed a Double Top Below 2100 Figure
  • Crude Oil Drop Pauses, Gold Breaks Five-Month Down Trend

Can’t access the Dow Jones FXCM US Dollar Index? Try the USD basket on Mirror Trader. **

US DOLLAR TECHNICAL ANALYSIS – Prices may be preparing for a pullback having put in a bearish Evening Star candlestick pattern below a five-year high. A daily close below the 14.6% Fibonacci retracement at 11434 exposes the 23.6% level at 11379. Alternatively, a turn above the 23.6% Fib expansion at 11528 opens the door for a challenge of the 38.2% threshold at 11616.

Gold Breaks 5-Month Down Trend, SPX 500 Double Top Firming

Daily Chart – Created Using FXCM Marketscope

** The Dow Jones FXCM US Dollar Index and the Mirror Trader USD basket are not the same product.

S&P 500 TECHNICAL ANALYSIS – Prices began to turn lower as expected. A drop below the 2041.50-49.10 area marked by the 14.6% Fibonacci retracement and the December 1 low exposes the 2018.10-22.10 zone (23.6% level, September 19 high). Alternatively, a move above the 2075.90-86.60 region (November 26 high, 14.6% Fib expansion) targets the 23.6% expansion at 2109.80.

Gold Breaks 5-Month Down Trend, SPX 500 Double Top Firming

Daily Chart – Created Using FXCM Marketscope

GOLD TECHNICAL ANALYSIS – Prices overcome resistance at a falling trend line set from early July, exposing the 50% Fibonacci retracement at 1237.59. A break above this barrier on a daily closing basis exposes the 61.8% level at 1262.96. Alternatively, a turn back below the intersection of the trend line and the 38.2% Fib at 1212.23 targets the 23.6% retracement at 1180.84.

Gold Breaks 5-Month Down Trend, SPX 500 Double Top Firming

Daily Chart – Created Using FXCM Marketscope

CRUDE OIL TECHNICAL ANALYSIS – Prices paused to consolidate losses after five consecutive days of downward momentum. A break below the 50% Fibonacci expansion at 65.96 exposes the 61.8% level at 64.30. Alternatively, a move above the 38.2% Fib at 67.63 targets the 23.6% expansion at 69.68.

Gold Breaks 5-Month Down Trend, SPX 500 Double Top Firming

Daily Chart – Created Using FXCM Marketscope

— Written by Ilya Spivak, Currency Strategist for DailyFX.com

To receive Ilya’s analysis directly via email, please SIGN UP HERE

Contact and follow Ilya on Twitter: @IlyaSpivak

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.
Learn forex trading with a free practice account and trading charts from FXCM.

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SPX Topping Valuations 4 – Gold Seek

The prevailing valuations in the lofty US stock markets are increasingly becoming a bone of contention.  Wall Street calmly asserts stocks are fairly valued or even cheap, since it has a huge vested interest in keeping people fully-invested.  But a growing chorus of dissenters is disputing that idyllic notion, warning that stock valuations are very high and portend great downside risk.  Indeed, topping valuations abound.

 

Since investing is all about buying low and selling high, the price paid for any investment is everything.  Buy good companies at cheap prices, and you’ll multiply your wealth over time.  But buying those very same good companies at expensive prices radically stunts future gains.  While cheap investments have great potential to soar as traders recognize their inherent value, expensive ones have already exhausted their upside.

 

And it’s valuations, not absolute stock prices, that define cheap and expensive.  Valuations are where stock prices are trading relative to their underlying corporate earnings streams.  The less investors pay in terms of stock price for each dollar of profits, the greater their ultimate returns.  Valuations are most often expressed in price-to-earnings-ratio terms, with stock prices divided by underlying corporate earnings per share.

 

This concept is so easy to understand, yet the vast majority of investors ignore it.  Imagine purchasing a house for a rental property that has expected annual rental income of $30k.  How much would you be willing to pay for it?  If you can get it for $210k, 7x earnings, it will pay for itself in just 7 years.  That’s a great deal.  But if that same house is priced at $630k, 21x, it will take far too long just to recoup the initial cost.

 

The stock markets work the same way, with each dollar of profits completely fungible.  And the US stock markets have a century-and-a-quarter average P/E ratio of 14x earnings.  That’s fair value for the stock markets as a whole, paying $14 in stock price for each $1 of underlying corporate earnings.  This makes a lot of sense, as stock markets exist to “lend” capital from those with surpluses of it to others running deficits.

 

The reciprocal of 14x earnings is 7.1%.  That’s a fair rate of return for those with excess savings they want to invest, and a fair price to pay for those who want access to that scarce capital.  14x facilitates mutually-beneficial transactions for each side of the capital trade, so it’s right where stock valuations have naturally gravitated towards over the very long term.  Cheap and expensive are defined from that baseline.

 

Half fair value, or 7x earnings, is very cheap historically.  Buying good companies’ stocks trading at 7x earnings is a virtual guarantee of massive wealth-multiplying future gains.  Conversely double fair value, 28x, is exceedingly-dangerous bubble territory.  Buying the same good companies’ stocks at 28x dooms invested capital to many years of lackluster gains at best, and catastrophic losses exceeding 50% at worst.

 

There’s nothing more important for investors to understand than general-stock-market valuations.  They move in great third-of-a-century cycles I call Long Valuation Waves.  These are divided into secular bulls and secular bears that each last about 17 years.  Valuations start out cheap near 7x, gradually expand to or through 28x in the first-half secular bulls, and then consolidate back to 7x in the second-half secular bears.

 

Unfortunately the US stock markets remain mired deep in the valuation-contracting secular-bear phase of their LVW today despite their epic cyclical bull of recent years.  How can that be true when the US stock markets have more than tripled since early 2009?  The flagship S&P 500, despite its massive gains, still remains below its real inflation-adjusted peak from the end of the last secular bull way back in March 2000!

 

The last cyclical bull peaked in October 2007, and ominously the US stock markets are trading at much-higher valuations today than they were back then.  This first chart looks at general-stock valuations as seen through the lens of the benchmark S&P 500, SPX.  Our methodology is simple and conservative, and very easy to replicate.  At each month-end, we record some key data from all 500 SPX component companies.

 

Each individual stock price is divided by that company’s latest four quarters of accounting profits per share as reported to the SEC, yielding individual P/E ratios for all 500 SPX components.  This is classic trailing-twelve-month methodology, involving hard historical data and no guesswork on future profits.  Then all 500 of these P/Es are averaged, both simply and also weighted by individual companies’ market capitalizations.

 

Here’s the results since the topping of the last cyclical bull, with the popular SPDR S&P 500 ETF (SPY) superimposed on top for price reference.  Contrary to Wall Street’s endless claims that the stock markets aren’t expensive today, prevailing valuations are actually way up at dangerous bull-slaying levels.  The SPX and therefore US stock markets are trading at topping valuations today, which is a super-bearish omen.

 

 

As November waned, the 500 elite component companies that comprise the S&P 500 benchmark index for US stock markets were trading at a simple-average trailing price-to-earnings ratio of 24.9x!  In other words, investors buying SPY shares today would have to wait a soul-crushing 25 years merely for underlying corporate profits at current levels to recoup the price they are paying.  That’s before real gains start accruing.

 

And even if the 500 individual trailing-twelve-month P/Es are weighted by their respective companies’ market capitalizations, the valuations don’t look much better at 22.7x.  Remember for the last 125 years or so, the US stock markets averaged 14x earnings.  21x was the warning level that signaled expensive markets likely to drift or slide, while 28x screamed of dangerous bubbles.  We’re right up near that realm today.

 

The last cyclical bull cresting in October 2007 died at SPX simple and MCWA P/Es of just 23.1x and 21.3x, about 8% and 7% lower than the current lofty valuations.  Stock-market valuations can only be bid so high before buyers are exhausted, paving the way for subsequent cyclical bear markets that cut stock prices in half to restore value.  Prevailing valuations are dragged back down below historical fair value.

 

Indeed by early 2009 when that last bear bottomed, valuations were again on the cheap side near 12x earnings.  So value-oriented institutional buyers returned, snatching up the widespread fundamental bargains.  And with corporate earnings still beaten down by the economic and psychological aftermath from 2008’s once-in-a-century stock panic, valuations rocketed as stocks soared while profits couldn’t keep pace.

 

But by late 2009, earnings were stabilizing and growing again so the price-to-earnings-ratio multiple expansion stalled.  Between mid-2009 and late 2012, the valuations of the SPX components weighted by their market caps were stable around 19x trailing earnings.  The rising stock prices in that cyclical bull were nicely mirrored by climbing underlying corporate profits, so the bull-market gains in that span were righteous.

 

But heading into late 2012, the US stock markets were looking toppy on a variety of key fundamental, technical, and sentimental fronts.  So the Fed decided to goose the flagging stock markets right before those key 2012 elections.  It launched a wildly-unprecedented open-ended quantitative-easing campaign, conjuring up vast amounts of new money out of thin air to use to monetize debt including US Treasuries.

 

QE3’s deluge of money printing along with the associated Fed jawboning radically distorted the global financial markets.  American stock traders came to believe the Fed was effectively backstopping the US stock markets, that it would quickly ramp up QE monetary inflation to arrest any significant stock-market slide.  So with all material downside risk apparently mitigated, investors flooded into the stock markets in droves.

 

So they soared.  But as this chart damningly reveals, nearly the entire SPX surge driven by QE3 over the past couple years was due to multiple expansion!  Stock prices surged higher, but the underlying corporate earnings couldn’t keep pace.  With the Ps of P/E ratios climbing much faster than the Es, general-stock valuations gradually rose to today’s dangerously-high levels.  Earnings didn’t justify that SPX surge.

 

Without any fundamental foundation, everything between roughly 1500 to 2100 on the S&P 500 is merely hot air injected by the Fed.  That means the overextended and expensive US stock markets face massive downside risk today.  This is even more apparent when considering where SPY would be priced if P/Es based on current trailing-twelve-month earnings merely mean reverted to 14x fair value.

 

The white line above shows where SPY would be trading at fair value, and it was way down near $116 when November ended.  That was a whopping 44% below where SPY was actually trading!  And even that was high in historical context.  Note above that the long sideways trend in fair-value SPY levels is between about $90 to just over $100.  SPY wasn’t able to break out of that until just in recent months.

 

With years of SPY (and therefore SPX) precedent within that consolidation fair-value trend, odds are the recent breakout not supported by earnings growth won’t last.  At some point very soon, the prevailing lofty stock-market valuations are going to mean revert dramatically lower.  And given our current position in those great third-of-a-century Long Valuation Wave cycles, that overdue multiple contraction should be massive.

 

This next chart zooms back out to show the entire secular bear in SPX terms since 2000.  Secular bears arise because stocks get wildly-overvalued by the ends of preceding secular bulls.  The mission of these 17-year bears is to gradually whittle stock valuations back down, from super-overvalued levels above the 28x bubble threshold to ultimately deeply-undervalued 7x levels near the ends of those secular bears.

 

This is accomplished not through a sharp stock-price decline, but a grueling 17-year sideways grind.  That gives underlying corporate earnings time to gradually grow into the lofty stock prices seen at the ends of secular bulls.  And that’s exactly what’s happened in the US stock markets since early 2000.  All the record highs in the SPX are a Fed-conjured illusion, as no new records have been seen in real terms!

 

In today’s dollars, the last S&P 500 secular bull crested well above 2125 in March 2000.  The best level we’ve seen in the Fed’s QE3 levitation is 2075, still well under that peak a whopping 14.7 years later.  So the secular-bear sideways grind is very real.  And while 14.7 years is a long time, it is considerably less than the full secular-bear duration of 17 years completing Long Valuation Waves.  The secular bear still lives!

 

And that means general-stock valuations are still headed back down near 7x earnings.  This long trend of multiple contraction is readily evident in this chart, as evidenced by the big dashed line.  At today’s stage in secular bears, prevailing stock-market valuations should be back down around 10x or 11x the underlying corporate profits!  And that will gradually trend down towards 7x before the 17 years are completed.

 

 

The SPX components’ trailing-twelve-month P/E ratios were right on secular-bear trend in late 2012 before the Fed decided to goose the stock markets with QE3’s vast debt monetizations.  And ever since then they have catapulted farther and farther away.  This has created enormous risk because nothing, not even powerful central banks, has ever been able to prematurely kill secular bears before their work is done.

 

So the next cyclical bear market, which is way overdue given today’s extreme overvaluations and far-overextended cyclical bull, is set to be particularly nasty since prevailing valuations were manipulated so far over where they should be at this point in the long-term stock-market cycles.  Normal secular-bear activity sees internal cyclical bulls double stocks after cyclical bears cut them in half.  This latest bull tripled them!

 

And there will be a steep price to pay, stock markets always see reckonings after any exceptional extreme.  They mean revert dramatically to not only unwind the unnatural extreme, but almost always to overshoot in the opposite direction before they stabilize.  Investors today need to be aware of the vast downside risks in these super-overvalued stock-market levels spawned by Fed manipulations, not profits growth.

 

Wall Street loathes this prudent contrarian perspective, as it is bad for business.  Professional money managers are always bullish because they get paid a percentage of assets under management.  So their financial incentives to keep people fully-invested no matter what, no matter how expensive and risky the stock markets happen to be, are vast beyond belief.  So they ignore overvaluations or rationalize them away.

 

The method of choice for lulling naive investors into complacency is to substitute forward P/E ratios for the classic trailing ones.  Rather than using the past four quarters’ hard actual earnings data, analysts estimate the next four quarters’ future earnings.  Of course this task is impossible given all the uncertainty, and analysts are not only always wrong on future earnings they are endlessly far too optimistic on them.

 

So when you hear some prominent money manager or analyst or economist declare that today’s stock markets are fairly valued, realize they aren’t talking about classic trailing-twelve-month P/E ratios.  What they are really saying is if corporate earnings surge dramatically in the coming year, today’s stock prices justify those future earnings.  Forward earnings are a farce, a confidence man’s tool used to fleece sheep.

 

The Fed’s QE3 money printing catapulted stock prices into this perverse fantasyland with no earnings foundation, but QE3 is now over.  The Fed recently killed QE3’s new bond buying, and thanks to the sweeping Republican Congressional victory last month the Fed’s hands are tied in launching any QE4.  For very good reasons, Republican lawmakers have long hated this Fed’s easy-money inflationary schemes.

 

They’re going to pressure the Fed politically to not only unwind its massive QE-inflated balance sheet, but to end its ludicrously unfair zero-interest-rate policy that has robbed from savers to subsidize debtors continuously since late 2008.  And rising rates have hugely bearish implications for prevailing stock-market valuations and absolute price levels.  Overvalued stocks and rate hikes are truly a recipe for disaster.

 

One of the reasons QE3 pushed stock prices to such lofty extremes was the Fed squeezing the rates of return in the bond markets so hard.  As bond yields were forced down to next to nothing, well below money-supply inflation rates, investors fled to stocks catapulting them higher.  As interest rates inevitably start to normalize, some of the bond investors who didn’t want to park capital in risky stocks are going to sell.

 

In addition, one of the biggest sources of stock-share demand in the past couple years of the Fed’s QE3 levitation was the gargantuan corporate buybacks.  In order to keep their earnings per share growing in Obama’s stagnant economic environment, companies spent hundreds of billions repurchasing their own shares to reduce their float which increases EPS.  They paid for these not through profits, but borrowing.

 

So as the Fed’s zero-interest-rate policy ends, the ability of companies to borrow money at artificially-cheap next-to-nothing rates will vanish.  So will the stock buybacks, which incidentally are also a major topping sign.  This will not only greatly reduce overall stock-share demand, but slash the fancifully-high earnings-per-share growth analysts are hoping for in the coming years.  So valuations will look even higher!

 

In light of all this and even more very bearish developments on the fundamental, technical, and sentimental fronts, today’s stock-market topping valuations are extraordinarily risky and dangerous for investors.  Bulls are always followed by bears, and this latest bull specimen was abnormally long and large thanks to the Fed’s manipulations.  So when the stock markets inevitably swing the other way, it’s going to get ugly.

 

Investors have rarely needed a prudent contrarian source of market intelligence as much as they do today.  Massive stock-market changes are coming as stock prices and valuations mean revert far lower, and the investors trapped unaware in this are going to lose fortunes.  Merely-average cyclical bears cut stock prices in half, and after the epic excesses of recent years the next cyclical bear will likely be exceptional.

 

At Zeal we’ve been walking the contrarian walk for well over a decade, earning fortunes for our long-term subscribers.  We buy stocks cheap when they are deeply out of favor, then later sell them high when everyone else comes around and gets excited about a sector.  It’s absolutely essential to cultivate contrarian thought and trading philosophies with the stock markets so expensive and overdue for a major selloff.

 

We’ve long published acclaimed weekly and monthly contrarian newsletters for speculators and investors.  They draw on our decades of hard-won experience, knowledge, wisdom, and ongoing research to explain what’s going on in the markets, why, and how to trade them with specific stocks.  With massive changes in these lofty overvalued stock markets imminent, subscribe today and learn how to protect your future!

 

The bottom line is the US stock markets are dangerously overvalued today, with trailing P/E ratios well above bull-slaying levels.  After the last time this happened, stock prices were more than cut in half.  And once again another cyclical bear is overdue, and it’s likely to be a doozy after such an incredible and artificial stock-market surge fomented by Fed manipulations.  Buying stocks high has rarely been riskier.

 

And the same Fed that created the conditions to spark such rampant overvaluations has been sidelined politically.  So once the next serious stock-market selloff inevitably gets underway, there will be no Fed backstop to entice euphoric investors to rush back in to buy expensive stocks.  Merely to return to fair value based on today’s corporate earnings, not even overshoot, stock-market levels will have to fall dramatically.

 

Adam Hamilton, CPA

 

December 12, 2014

 

So how can you profit from this information?  We publish an acclaimed monthly newsletter, Zeal Intelligence, that details exactly what we are doing in terms of actual stock and options trading based on all the lessons we have learned in our market research.  Please consider joining us each month for tactical trading details and more in our premium Zeal Intelligence service at … www.zealllc.com/subscribe.htm

 

Questions for Adam?   I would be more than happy to address them through my private consulting business.  Please visit www.zealllc.com/adam.htm for more information.

 

Thoughts, comments, or flames?  Fire away at [email protected].  Due to my staggering and perpetually increasing e-mail load, I regret that I am not able to respond to comments personally.  I will read all messages though and really appreciate your feedback!

 

Copyright 2000 – 2014 Zeal LLC (www.ZealLLC.com)

 

— Posted Friday, 12 December 2014 | Digg This Article | Source: GoldSeek.com

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Despite Today's Strength, SPX Still Needs to Prove Itself – FXStreet

What is particularly illuminating about the enclosed candlestick version of the cash SPX chart is that it clearly shows that today’s price range “fits” inside of yesterday’s price range.In technical jargon, today’s action so far represents an “Inside Day,” meaning that the low and the high fit inside of yesterday’s low-to-high range.As powerful as today’s upmove is, its technical significance would be considerably more meaningful (to the bulls) if the SPX climbs above Wednesday’s high at 2058.86.In the absence of a climb above Wednesday’s high, today’s “Inside Day” action does not in and of itself reverse the near-term downtrend off of the Dec 5 high at 2079.47.In fact, what today’s action represents is a “rest/digestion” period within the still intact near-term downtrend.All eyes on 2058.86 for the rest of today’s session. Last is 2053.10…Mid day Minute

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Relative Strength Alert For SPX – Forbes

The DividendRank formula at Dividend Channel ranks a coverage universe of thousands of dividend stocks, according to a proprietary formula designed to identify those stocks that combine two important characteristics — strong fundamentals and a valuation that looks inexpensive. SPX Corp. (NYSE: SPW) presently has an above average rank, in the top 50% of the coverage universe, which suggests it is among the top most “interesting” ideas that merit further research by investors.

But making SPX Corp. an even more interesting and timely stock to look at, is the fact that in trading on Wednesday, shares of SPW entered into oversold territory, changing hands as low as $82.63 per share. We define oversold territory using the Relative Strength Index, or RSI, which is a technical analysis indicator used to measure momentum on a scale of zero to 100. A stock is considered to be oversold if the RSI reading falls below 30.

Click here to find out what 9 other oversold dividend stocks you need to know about, at DividendChannel.com »

In the case of SPX Corp., the RSI reading has hit 28.4 — by comparison, the universe of dividend stocks covered by Dividend Channel currently has an average RSI of 50.1. A falling stock price — all else being equal — creates a better opportunity for dividend investors to capture a higher yield. Indeed, SPW’s recent annualized dividend of 1.50/share (currently paid in quarterly installments) works out to an annual yield of 1.78% based upon the recent $84.69 share price.

A bullish investor could look at SPW’s 28.4 RSI reading today as a sign that the recent heavy selling is in the process of exhausting itself, and begin to look for entry point opportunities on the buy side. Among the fundamental datapoints dividend investors should investigate to decide if they are bullish on SPW is its dividend history.

In general, dividends are not always predictable; but, looking at the history chart below can help in judging whether the most recent dividend is likely to continue.

SPW+Dividend+History+Chart


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According to the ETF Finder at ETFChannel.com, SPW makes up 1.40% of the First Trust Industrials/Producer Durables AlphaDEX Fund ETF ( AMEX: FXR ) which is trading relatively unchanged on the day Wednesday.

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