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Stocks – scant value in momentum market
I have discussed various yardsticks of evaluating US equities over the past few days. In short, my conclusion is that while the longer-term technical picture points to the cyclical bull market still being intact, short-term measures are exceedingly overbought and valuations look stretched whichever way you slice and dice the fundamental metrics. Of course, bull markets can stay overbought and overvalued for a long time and it is a mug’s game to try and pre-empt tops. It’s called a “momentum market”. However, it still makes sense to understand as fully as possible what the playing field looks like. Below is a short update on another tool I have been following for a while. The 12-month momentum of US equities, as measured by the S&P 500 Index, narrowly tracks the US GDP-weighted Purchasing Managers Index (PMI). Current levels of the S&P 500 indicate the market is expecting a GDP-weighted PMI in excess of 60 (currently 54). If the Index maintains its current levels, the 12-month momentum will drop from 47.1% to 46.1% by the end of March and 33.6% by the end of April. Even this drop in momentum requires the GDP-weighted PMI to rise to 57 and higher. A rise from 54 to 57 is not impossible but improbable given the sub-par economic recovery. I am therefore inclined to deduce that the US stock market is also overpriced in terms of this analysis (although not grossly so), even if the GDP-weighted PMI should improve to 57. Source: Plexus Asset Management (based on data from I-Net Bridge). 3 comments to Stocks – scant value in momentum marketLeave a Reply | |||||||||||
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thank you for this analysis.
but how do they calculate the GDP weighted PMI?
when i weigh serice PMI of 53 with 80% and man. PMI of 56.5 with 20% the result is 53.7 and not 54!
could you please comment on this?
thank you!
[…] stock prices. Stock price momentum and PMI (chart): http://www.investmentpostcards.com/2010/03/24/stocks-%E2%80%93-scant-value-in-momentum-market/?utm_s… New highs lag the Market (chart): […]
Sure, that is my answer as well – I have just rounded.