The action in the stock market appears to be as confused as the message coming out of Goldman Sachs last week. If you will recall, it was Goldman’s “valuation call” recently that sent stocks tumbling. Then the very next day, it was the wealth management arm of Goldman saying stocks are not overvalued and that clients should stay fully invested.
Although stocks rallied again the next day (without the help of Goldman’s guidance this time), the state of the market remains a bit of a question mark. In fact, the state of the market’s trend depends entirely on which index one is viewing. For example, if you look only at the Dow Jones Industrial Average, you would conclude that stocks are in a downtrend. Yet, if you follow the Russell 2000 smallcaps or the Midcaps, you would contend that the market has recently embarked on a new leg higher. And if you spend your days looking at a chart of the S&P 500, your would likely conclude that stocks are in a trading range.
So, while we wait for traders to sort this thing out, we thought it would be a good time to finish up our review of the important market models – something we like to refer to as the “market math.” Today, we’ll explore another approach to looking at stock market valuations.
Building a Valuation Model
The idea behind using a “tree of indicators” approach (i.e. a market model) is to avoid the type of problems we saw in the GAAP P/E indicator in yesterday’s missive. Unfortunately though, it doesn’t matter currently whether you look at Price-to-Dividend, Price-to-Book Value, or Price-to-Cash Flow, the problem is the same – the data is all over the map and it is very difficult to draw any type of objective conclusions from the indicators.
David Moenning is the founder and chief investment strategist for StateoftheMarkets.com, a website dedicated to investor education and portfolio analysis. Mr. Moenning is also President of Heritage Capital Management, a privately owned, investment management firm. Founded in 1989, Heritage is focuses on risk management and an “own the best and ignore the rest” equity selection strategy.
For up to the minute updates on the market’s driving forces, Follow Me on Twitter: @StateDave (Twitter is the new Ticker Tape)
Positions in stocks mentioned: none
The opinions and forecasts expressed are those of David Moenning, President of Heritage Capital Management (HCM) and may not actually come to pass. Mr. Moenning’s opinions and viewpoints regarding the future of the markets should not be construed as recommendations of any specific security or Heritage Capital program. No part of this material is intended as an investment recommendation. Neither the information nor any opinion expressed constitutes a solicitation to purchase or sell securities or any of HCM’s programs. Do NOT ever purchase any security without doing sufficient research. There is no guarantee that investment objectives outlined will actually come to pass. Investors should consult an Investment Professional before investing in any investment program. Neither Mr. Moenning or Heritage Capital Management nor any of their employees shall have any liability for any loss sustained by anyone who has relied on the information contained herein. Mr. Moenning and employees of HCM may at times have positions in the securities referred to and may make purchases or sales of these securities while this publication is in circulation. The analysis contained is based on both technical and fundamental research. Although the information contained is derived from sources which are believed to be reliable, they cannot be guaranteed.