Stocks – scant value in momentum market
Posted By Prieur du Plessis On March 24, 2010 @ 11:54 am In Investment,Stocks | 3 Comments
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.
[1]
Source: Plexus Asset Management (based on data from I-Net Bridge).
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[2] Did you enjoy this post? If so, click here to subscribe to updates to Investment Postcards from Cape Town by e-mail.: http://www.feedburner.com/fb/a/emailverifySubmit?feedId=921608&loc=en_US
[3] (What's this?): http://www.wikinvest.com/blogger/wikinvest_wire
[4] Fusing Business Momentum and Value: http://www.fusioninvesting.com/2010/03/fusing-business-momentum-and-value
[5] Why We May See a Rally in U.S. Stocks: https://moneymorning.com/2011/12/19/why-we-may-see-a-rally-in-u-s-stocks
[6] Stocks Keep Rallying: http://randomroger.blogspot.com/2012/02/stocks-keep-rallying.html
[7] Momentum: http://www.wikinvest.com/wiki/Momentum
[8] S&P 500 (SPX): http://www.wikinvest.com/index/S%26P_500_(SPX)
[9] Wikinvest: http://www.wikinvest.com
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