Chart of the Week: Stocks Are Overvalued (April 2, 2011)
A chart from dshort.com of the Q-Ratio suggests stocks are remarkably overvalued.
You won't hear anything about it from the mainstream financial media or the Federal Reserve, but this chart is screaming "stocks are extremely overvalued." Please visit dshort.com's excellent overview Market Valuation: The Message from the Q Ratio for additional charts of the Q Ratio, a measure of stock market valuation.
Although the mainstream financial media is touting low price-earnings ratios and permanently rising profits as the backdrop for a permanently bullish stock market, this chart reveals that stocks are more overvalued now than they were just prior to the Great Crash of 1929. Only the bubble of the dot-com era reached a higher extreme.
There is literally no reason to be bearish on stocks, at least in the mainstream media ("don't fight the Fed," etc. etc.), and there is always a chance that overvalued stocks can become even more overvalued (the "party like it's 1999" phenomenon).
What's remarkable about this chart is the consistency of the highs and lows going back 100 years: the tops and bottoms are within a few ticks of each other, except for the dot-com bubble and the current bubble, both of which were blown by vast expansions of credit, State backstopping/intervention and leverage.
It's also interesting to note that the Federal government and the Federal Reserve intervened so massively that the market wasn't allowed to fall to previous cyclical lows. That further suggests that when the market overcomes the forces of intervention, it might fall below previous lows in a counter-reaction.
But not to worry--that's "impossible."
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