7 reasons why investors appear complacent and a decline in stocks could ensue. From David Rosenberg and Gluskin Sheff:
- According to Investors Intelligence, there are now three times as many bulls as there are bears. Almost everyone is a performance chaser.
- Market Vane sentiment on equities has firmed to 57%, higher than it was in September 2007 when the market was beginning to crest. We didn’t see a number this strong in the last cycle until September 2003 when the recession was already two year’s behind us. By way of comparison, at the March lows, it was sitting at 32.
- Not one of the 12 seers polled by Bloomberg sees a down-market for 2010. The median increase in the S&P 500 is +11%.
- The VIX is down to 19, right where it was at the market peaks back in October 2007.
- The S&P 500 dividend yield is back below 2% for the first time in over two years.
- Corporate bond spreads and CDS credit default swaps have collapsed to levels not seen since two years ago.
- Based on the Shiller normalized P/E ratio, which is based on the 10-year trend in real corporate earnings, the S&P 500 is trading with a 20x multiple versus the long-run average (back to 1881) of 16x. This market, in other words, is more overvalued now (25%) than it was in heading into October 1987. To be sure, the average ‘overvaluation gap’ at a market peak is 50% so the argument can certainly be made that the market can go even higher from here until it rolls over. That may well be the case. But investors should be aware that at this stage, they are buying into a very expensive market and the ability to time the exit strategy is more than just an art. Those buying stocks in hopes of catching a classic blow-off to a bubble peak — remember, this market is already 25% overvalued based on the most tried, tested and true valuation metric.
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.