Magazine article Modern Trader

'Expensive' S&P 500 a Bearish Signal? (Standard & Poor 500 Return to the Expensive Ratios for First Time since The

Magazine article Modern Trader

'Expensive' S&P 500 a Bearish Signal? (Standard & Poor 500 Return to the Expensive Ratios for First Time since The

Article excerpt

`Expensive' S&P 500 a bearish signal?

Technicians take note: Long-term, quantitative analysis of the stock market has uncovered some rather sobering considerations.

Historically, when you subtract current Treasury bill rates from earnings yields for the overall Standard & Poor's (S&P) 500, the difference usually falls between 1.5 and -0.5 percentage points. At more than 1.5, stocks should be the best investment. Below -0.5, money market instruments are more attractive.

In the weeks before the October 1987 debacle, this gauge fell to -2.0, correcting itself only after post-crash loosening by the Federal Reserve.

This same indicator is once again headed for negative territory.

"It's the first time since the crash that the S&P has returned to the `expensive' ratios," says Craig Corcoran, an editor with Davis/Zweig Futures in Bellmore, N.Y., citing a stance by the Federal Reserve that has gone "from unfriendly to hostile."

Fed actions are only one of three variables making up Corcoran's opinion. He also cites a fundamental valuation model and investor demand -- measured by cash on hand.

Unlike earnings, which he regards as too subjective, Corcoran says dividends -- as an investor's "cold cash" measure of value -- should help evaluate the market.

He says investors normally pay between 18 and 30 times the dividends for their stocks. The average is 23 times. Based on 1988 Dow Jones Industrial Average (DJIA) dividends, the DJIA would be expensive at 2400, neutral at 1810 and a bargain at 1280, according to Corcoran. …

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