The major stock market indices have been moving in a volatile, back-and-forth, up-and-down fashion for three and one-half months now. For anyone attempting to stay in tune with the trend of the market, this has been a frustrating time as the S&P has changed direction no fewer than 9 times since the beginning of December.

Yet during this annoying period, the S&P 500 has made a total of 12 new all-time highs, the NASDAQ flirted with the 5,000 level again, and even last year’s much-maligned small caps reached fresh all-time highs. The problem is that the moves to new highs were not met with follow-through buying or a new leg higher. As such, the current trend among the fast-money types is to greet each new high with selling.

While the bears have clearly prevented the bulls from gaining any meaningful ground, our furry friends remain frustrated as well. You see, despite all the volatility and all the big down days seen this year, the S&P 500 closed Friday just 3% below the most recent all-time high set on March 2.

In short, both teams have had opportunities. And yet both teams have failed to get anything done. Thus, the obvious question is, why?

For Every Plus There Is a Minus…

To hear the bears tell it, their problem is that every time they get something going to the downside, some central bank announces plans to print a whole boatload of new money. Therefore, the big banks, hedge funds etc. able to participate in various carry trades continue to play on. And then the dip-buyers come in with the knowledge that at least some of those new yen and euros being printed will wind up in the U.S. stock (and bond) market.

On the other side of the court, our heroes in horns continue to struggle as well. The problems the bulls face include (a) a surging dollar, (b) falling earnings expectations, (c) a Fed that threatens to become a little less friendly in the next few months, and (d) valuations that are no longer a positive.

So there you have it; every plus has been met with a minus recently and vice versa. And the end result is a manic/depressive market that can’t move in any one direction for even a month at a time.

Are Valuations Really a Problem?

The bears contend that valuations are becoming a problem. By now, everyone has seen Dr. Shiller’s CAPE index and the dire warning it provides. However, valuation is a VERY tricky subject as there are many different metrics to consider and just as many ways to view the data.

So, in an effort to determine if valuations are indeed the problem that our friends in the bear camp contend, we thought we would take a look at a couple P/E ratios, the Price-to-Sales, Dividend, and Book Value ratios, as well as a model that looks at stock market values relative to interest rates.

So, let’s get started…

Read the rest of the report…


David Moenning

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David Moenning is Mr. Moenning is President of Heritage Capital Research, a privately owned, investment research firm. Heritage focuses on active risk management and an “own the best and ignore the rest” equity selection strategy.

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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.