This morning, we'll continue our look at the market through the three primary time-frame lenses. Yesterday, we reviewed the action and the drivers from the short- and intermediate-term view. Today, we will focus on the bigger picture. So, without further ado…
LONG-TERM (>6 months): Moderately Positive
Warren Buffett's latest big purchase (Berkshire Hathaway announced the acquisition of Precision Castparts for $37.2 billion) tells investors that one of the greatest investors of our generation is not overly concerned about stock market valuations at this time. And since valuations have become a focal point for the bears recently, this is a big deal, in more ways than one.
However, our “absolute” valuation metrics suggest that stocks are definitely not cheap at the present time. Take a look at the right side of the lower clip on the chart below. While, the data is a couple months old, the message from the red line (the median P/E ratio of the S&P 500) is clear. With the exception of the “bubble period,” the current level of this indicator is about as overvalued as it gets.
But to complicate matters further on this topic, the “relative” valuation indicators (these indicators include the level of interest rates into the equation) tell us that valuations remain very reasonable on a historical basis.
For example, the chart below is a valuation model that contains 7 different “relative valuation” indicators, which are all yield based. The indicators include: Earnings yield, Dividend yield, Book value yield, Real earnings yield, Earnings yield to bond yield spreads, etc.
The first thing to note on this chart is that undervalued and overvalued have been flipped from the prior chart. On the chart above, readings above the dashed lines suggests stocks are good values relative to interest rates and vice versa. As such, it is clear that stocks remain a good buy given the level of interest rates at the present time.
So, the message from Mr. Buffett's actions should come through loud and clear. Given that even with the Fed's desire to get off the zero bound, folks like Buffett appear to believe that stocks remain good values from a long-term perspective.
Next, there is the price action of the market itself from a long-term perspective. Remember as Stan Weinstein was famous for saying, “The tape tells all.”
S&P 500 – Long-Term Perspective
On the chart above, the blue box highlights what we view as the long-term time frame – so we'll focus on the action within the box here. As you can see, the longer-term moving average (50-week) is still rising and suggests that the market remains in an uptrend from an uber-long term perspective.
However, the red box highlights the sideways action that has been prevalent this year. From my perspective, this would appear to be a sideways consolidation pattern. In addition, we should note that the 10- and 30-week moving averages are now on top of each other and moving sideways.
Therefore, we can argue that the current longer-term price action represents a consolidation within an ongoing uptrend.
Finally, there is my “desert island indicator” which, for me, is the final arbiter of all arguments between the bulls and the bears. This model reviews the technical health of 104 industry groups to indicate the overall health of the market.
The good news is this model remains on a “buy signal.” (For the record, I've been working with this model since 1994.) Thus, from a big-picture perspective, we believe that both advisors and investors alike should continue to put money to work whenever the indices take a “dip.”
Publishing Note: I will be traveling in Europe for the next couple weeks as my wife and I celebrate our 35th wedding anniversary. As you might suspect, morning reports are likely to be sparse between now and Labor Day.
Read More – StateoftheMarkets.com
David Moenning is Chief Investment Officer at Heritage Capital Management, a Chicago-based registered investment advisory firm. Mr. Moenning began his investment career in 1980 and formed Heritage Capital in 1989. Dave’s firm focuses on “active management” and focuses on managing market risk on a daily basis. Dave is also the proprietor of StateoftheMarkets.com, which provides free and subscription-based portfolio services. Mr. Moenning is the 2013-14 President of NAAIM (National Association of Active Investment Managers) an organization dedicated to active management strategies. Follow Dave on Twitter at @StateDave.