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Stocks continue to operate based on complete delusions.
The market move in the last two years was based on multiple expansion. In
the simplest of terms, this means that stock prices rose exponentially higher
relative to earnings. If stocks were trading at a P/E of 15 and the P (price)
rises 200%, while the E (earnings) rises only 20%, then there is multiple
expansion.
Multiple expansion indicates sentiment, NOT fundamentals. It means that
investors believe that the economy is expanding, and that earnings will
growing rapidly to catch up with prices going forward. It is, in
effect, an indicator of bullishness.
As Not Jim Cramer noted recently, the percentage of investors who are
bearish is at an all tine low. Put another way, on a percentage basis, fewer
investors are bearish than during the 2007 peak AND the height of the Tech
bubble.
 
Again, this is an indicator of a stock market driven
bullishness, not fundamentals.
Indeed, based on Cyclically Adjusted Price to Earnings or CAPE, stocks are
the at one
CAPE is the single best predictor of future stock market returns. Based on
a study completed Vanguard, as a predictor, CAPE outperformed:
1. P/E ratios
2. Government Debt/ GDP
3. Wall Street forecasts/ consensus
4. Trend analysis of stock charts
5. Trending GDP growth
6. Dividend yield
7. The Fed Model
8. Trailing ten year returns
…and many other metrics used by investors to predict market value.
Put another way, if you want to predict how stocks will perform in the
future, there is no single better measure than CAPE.
The CAPE is at its 3rd highest reading going back to
1890. Only the 1929 bubble and the Tech Bubble were more
expensive relative to earnings. BOTH OF THOSE READINGS INDICATED
TOPS THAT RESULTED IN STOCKS LOSING 50-90%.
The market is on very thin ice. It may top tomorrow or next week or next
month. But when it does, stocks will be poised for a Crash that will rival
what happened when the Tech Bubble burst.
If you’ve yet to take action to prepare for the second round of the financial
crisis, we offer a FREE investment report Financial Crisis "Round
Two" Survival Guide that outlines easy, simple to follow
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