U.S. Stock Valuations are Rising

One way to measure stock valuations (P/E ratio) is the CAPE ratio, which smooths earnings over a ten year period. This ratio for the S&P 500 hit 28.7 this week, which is in the 94th percentile going back to 1928.

The only periods in history with a higher CAPE ratio were July through October 1929 and February 1997 through April 2002.

While it doesn’t mean prices can’t go higher, because they can, it just means the risk to reward at these levels becomes much less compelling. Also something investors should keep in mind, the higher this goes, the worse the eventual snap back can be.

IPO Hangover

I find most IPO’s follow a similar path of rocketing higher with unabated enthusiasm until they finally succumb to the eventual selling of a Wall Street over-hyped sales pitch. There usually is nothing wrong with the company but rather it’s a matter of running out of buyers as the IPO chasers and company holders take profits. No, not every IPO acts this way but, in my experience, most do which is why I typically avoid them.  But let’s be clear, I don’t avoid them completely because they eventually become very attractive investment targets once they finally bottom from their IPO induced hangover. 

Teledoc, TDOC, is a great example of this “IPO pattern”. (I would recommend readers memorize this as it is one of the market’s best money making patterns that continues to repeat and provide smart investors a way to bank coin). As you can see in the chart below, after 5 short weeks and a more than 65% climb from its IPO, the sellers overwhelmed the buyers and pushed the stock to level more than 50% below the IPO price, where it sniffed the $9 level and eventually formed a divergent low double bottom.

From that double bottom, TDOC quickly rose more than 100% in four short months and has since consolidated sideways in an attempt to digest those gains and build energy for its next move. While the week is not over, a breakout with confirmation (ie, bullish RSI momentum, volume confirmation and along with price) above last September highs (blue horizontal) provides a very attractive and objective entry who’s first upside target is 20+% higher. Assuming it makes it there, the next logical resting point is more than 50% above which is what has me watching this opportunity with great interest. 

Time For a New You?

Are you finding its hard to keep up with the ever changing world and it is passing you by?  The book, Reinvent Yourself by James Altucher provides some very poignant “take-aways” as he tells his reinvention story of how he handled the constant change and stress caused by our ever changing world. A few nuggets that hit home for me:

 “You are not just the average of the five people around you. You’re the average of the five habits you do, the things you eat, the ideas you have, the content you consume, etc.”

 “Many people die at 25 but are not put in the coffin until 75. The learning stopped for them early.”

 “If I want to sell an idea, if I want to convince, if I want someone to like to me, I have to figure out how to connect.”

 “It’s hard to be the greatest at any one endeavor, but by combining passions, it’s much easier to be the greatest in the world at the intersections of those passions.

“Not a single ounce of greatness in history ended with thoughts. It happened with hands. With actions.”

 “Money is a side effect of trying to help others: of trying to solve problems. So many people ask, “How do I get traffic?” That’s the wrong question. If you ask every day, “How did I help people today?” then you will have more traffic and money than you could have imagined.”

 “When people associate the worth of their lives with any one activity, it’s unhealthy.”

Practice doesn’t make perfect. Practice with the clear goal of getting better every day does. Some people say that they have 10 years of experience, but they have actually repeated their first year ten times.

 “There are only two types of decisions: decisions made out of fear and decisions made out of growth.”

 “I still don’t like to lose. I hate it. It’s the worst feeling. But I never let a good loss go to waste. The only way to learn is to study something you never knew before. Losses are the maps that point you to what you never knew before.”

A Lot of Nothing

The S&P500 did a lot of nothing last week, continuing 2017’s trend of doing even more of absolutely nothing. That is unless you consider consolidating sideways and allowing the overbought, negative divergence to unwind something. As you can see below, the SP500 has been

sandwiched between 2,240 support and 2,280 resistance since the year started because traders are stubbornly sticking to their positions. Prices move when people change their mind and right now bulls are staying bullish and bears are staying bearish.  Headlines and economic data no longer matter when people stop trading them.

No matter what happens, we are within spitting distance of all-time highs and only the most stubborn bears are claiming the world is falling apart. The more times price tests a level the higher the likelihood it eventually breaks through. This, combined with the potential bull flag continuation pattern has me expecting higher prices in the near term. Markets tumble quickly from unsustainable levels and right now the market seems quite comfortable here. No matter what the market “should” be doing, when confident owners keep supply tight, prices continue creeping higher.

While I am optimistic, one thing does provide me pause, current sentiment.  As we know, sentiment is a contra-indicator and while advisors have reigned in some of their bullishness since the start of the year, it is still too high yet to be a tailwind to higher prices.

A Huge Disconnect

Since the election and into year end, the market has ripped higher. During this same time trailing earnings/share estimates have moved lower, creating the largest divergence during the past 10 years.

The question investors need to ponder is who is right?  Earnings estimates or the market? The larger the divergence the larger the potential correction so making sure you are on the right side of the next move is of critical importance. The good news is we will likely find out the answer to our question real soon as earnings season has already started but will be in full swing next week.

Regardless of what happens, are YOU ready?