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Linked below is M*'s Market Fair Value Graph which currently reflects that the market in general is currently selling for about six percent below its fair value. You can click on the sectors if you wish to view their valuation. Currently, as I write, there is only one major sector that is above fair value ... communication services.
I was studying the graphs. They seem to be counterintuitive. Just take a look. When graph falls below the line, it seems to be good sell indicator and vice versa.
Another way of saying, once market starts getting overvalued, get in and stay in until it starts getting undervalued, then get out.
Appreciate if someone else can verify what I'm saying. It sure seems that way to me.
Okay, I may be confused in various different ways, but I dunno what you are talking about. Just look at the graph.
Overvalued to me means "don't buy". Undervalued means "buy". If you look at that chart when it crosses over from one side to the other and plot it against the market over the past year and maybe you see what I'm taking about.
I think I know what you are saying ... and, here is what I do.
Say I am short equities within my asset allocation I buy when the graph indicates the market is undervalued. And, if I am overweight equities within my asset allocation I sell some off when the graph indicates the market is overvalued.
So, to carry this a step further ... One can perform this analysis by sector and buy sectors that are undervalued and sell down sectors that are overvalued to rebalance thus maintaining an established weighting by sector within ones equity allocation if they so choose.
Currently, I stive to keep at least a five percent weighting to the minor sectors of materials, real estate, communication services and utilities. And, for the major sectors I stive to maintain at least a nine percent weighting. This leaves about seventeen percent that can be moved around within my sector allocation to overweight certain sectors of choice.
It is not a perfect system ... But, it is one that I currently employ by striving not to let a sector fall below its established minimum weighting. Recently, I have had to buy in my funds that were deeply exposed to the materials and energy sectors to maintain my minimum weightings to these sectors. Both of these sectors are currently oversold according to the graph with materials being about ten percent oversold and energy about twenty percent.
Currently, my overall equity weighting within my asset allocation bubbles at about 50% with a high range being about 60% and a low range being about 40%. With this, I have an open to buy on equities since the market valuation graph is indicating that equities are oversold. With the current market pullback I am now looking to average into a special equity investment (spiff) position to raise my allocation to equities. I generally load equities in the fall and lighten up in them by late spring. In addition, I like to invest in a spiff during a good market pullback thus playing the anticipated swing.
Indeed, a simple system that has worked well for me in the past.
I would suggest using the Morningstar Fair Value chart with caution. I tried using it when the market crashed in 2008/2009 as a way to judge when to put money into the market [and I used their fair value calculations to determine when individual stocks were cheap enough to buy].
The problem is that the calculations are not static. They change as the economy and company earnings improve or decline. So you may believe you are entering the market at say a 20% discount to fair value (or buying a stock at a 20% discount), only to see Morningstar revise their estimates downward as things change.
During 2008/2009, as the market continued to decline, Morningstar kept revising its fmv estimates lower so that I soon found myself holding stocks that I thought I was buying at deep discounts only to learn that Morningstar had revalued those stocks at substantial discounts from where I had bought them. It was frustrating.
Bank of America and St Joe are two stocks that stand out as examples of Morningstar drastically reducing its fair value calculations during the bear market. Morningstar also made big reductions for the stock market.
So today's 6% discount to fair market value may change as Morningstar reconsiders its calculations to adjust for a slowing economy.
Thanks for stopping by and making comment about your experience. I think this is an experience to share that some might not be aware of.
Morningstar's Fair Value Graph is not the only matrix I use to determine the value of the market. Most valuation methods remain in flux and are not a constant and with this are subject to change from time-to-time as conditions change within the markets, the companies and the economy themselves. Look at forward earnings estimates as they are indeed not a constant and most often get revised. Then there are also cash flow models and others methods such as technical analysis used by some for valuation. To keep it simple I'll continue with earnings.
Today full year forward estimates on the S&P 500 Index are at about $117.00; and, I have seen them as high in the mid $120.00's range this year. As of late most forward estimates are getting resived downward. Heck, I have seen the trailing twelve month earnings (TTM) fall thus far this year and at the close of 2014 they were at about $100.00 range for the S&P 500 Index and are now at about $97.00 range. To me, this speaks volumes about the recent market pullback (falling earnings).
As an investor in the stock market I know that I am buying earnings with every investment I make. With this, I put more weighting on the trailing twelve month earnings (TTM) for the market than I do on forward estimates as they seem get revised often and currently to be falling and are not expected to start rising again until sometime in the fourth quarter. I am looking for this to be a set up for a fall stock market rally especially since the market has been in recent decline. Will it happen? We want know until sometime after the fact. Remember, there are many things at play that could effect my current thinking both in a positive as well as a negative way.
To me investing is not an exact science as there are many factors that influence the stock markets price and these things, and more, put it in constant change. I think most seasoned investors know this but I can also understand there are perhaps some that don't.
As a long term investor I have seen good capital appreciation on most all of my investments through the years including the effects that have come from market pullbacks on valuations. At times, I have bought some investments that would go into the red not to long after I purchased them but when held for the long term I most always came out ahead. And, yes there have been a few that did not. However, for me and for the most part, I have found through the years that market pullbacks were a good time to put new money to work within my portfolio for both a long term investment perspective as well as for a special shorter term investment to play the swing. And, indeed your entry point will have great influence on the out come.
I think what @VintageFreak is saying is that based on these charts, momentum investing looks like a better idea than value investing in equities as well as in bonds, where @junkster has a more refined and very successful momentum model.
But tempermentally I'm more suited to @Old_Skeet's method: try to buy when prices are good, even if they'll possibly get still better and leave me with a paper loss, then hold for a long, long time. Since almost all my assets are in a taxable account, I've a further motive to keep trading to a minimum.
Old_Skeet: I appreciate your comments. Focusing on prior earnings makes sense to me. Even that can be a challenge. Too often, market commentators fail to tell us if they are using operating or reported earnings, or some other method. It can be confusing.
Either way, today's pe ratios are high, so risk is also.
I think another thing that influences market prices is the use of leverage by big money and others. Some of these cats have direct link to the US Treasury through the Plunge Protection Team which was created by Ronald Reagan. With this prices get run up from what normal valuations would be along with associated P/E Ratios. I agree, from what I am finding through my study is that P/E Ratios are above normal. Now if big money feels interest rates are on the rise they are more apt to deleverage their positions and call their money home. I believe this is what has been happening somewhat this past week, or so.
I am providing a link for those that would like to follow the short money for SPY. If short positions start to rise then big money is most likely trimming their long positions and increasing their short positions. Anyway, that is my theory.
From review of the data provided in the link notice short interest has now deminished and the days to cover has been reduced by about 11%. This is telling me big money is starting to reduce short positions and perhaps starting to go long. Anyway, this is how I am reading the tea leaves, as I write, and with this I am anticipating a rebound in the markets coming soon.
And, as you have pointed out in your above opening comment ... little seems to be static when it comes to investing ... and, subject to frenquent change.
I'd be interested to know what others might think on this subject and comments are most welcome.
Comments
Another way of saying, once market starts getting overvalued, get in and stay in until it starts getting undervalued, then get out.
Appreciate if someone else can verify what I'm saying. It sure seems that way to me.
Overvalued to me means "don't buy". Undervalued means "buy". If you look at that chart when it crosses over from one side to the other and plot it against the market over the past year and maybe you see what I'm taking about.
I think I know what you are saying ... and, here is what I do.
Say I am short equities within my asset allocation I buy when the graph indicates the market is undervalued. And, if I am overweight equities within my asset allocation I sell some off when the graph indicates the market is overvalued.
So, to carry this a step further ... One can perform this analysis by sector and buy sectors that are undervalued and sell down sectors that are overvalued to rebalance thus maintaining an established weighting by sector within ones equity allocation if they so choose.
Currently, I stive to keep at least a five percent weighting to the minor sectors of materials, real estate, communication services and utilities. And, for the major sectors I stive to maintain at least a nine percent weighting. This leaves about seventeen percent that can be moved around within my sector allocation to overweight certain sectors of choice.
It is not a perfect system ... But, it is one that I currently employ by striving not to let a sector fall below its established minimum weighting. Recently, I have had to buy in my funds that were deeply exposed to the materials and energy sectors to maintain my minimum weightings to these sectors. Both of these sectors are currently oversold according to the graph with materials being about ten percent oversold and energy about twenty percent.
Currently, my overall equity weighting within my asset allocation bubbles at about 50% with a high range being about 60% and a low range being about 40%. With this, I have an open to buy on equities since the market valuation graph is indicating that equities are oversold. With the current market pullback I am now looking to average into a special equity investment (spiff) position to raise my allocation to equities. I generally load equities in the fall and lighten up in them by late spring. In addition, I like to invest in a spiff during a good market pullback thus playing the anticipated swing.
Indeed, a simple system that has worked well for me in the past.
The problem is that the calculations are not static. They change as the economy and company earnings improve or decline. So you may believe you are entering the market at say a 20% discount to fair value (or buying a stock at a 20% discount), only to see Morningstar revise their estimates downward as things change.
During 2008/2009, as the market continued to decline, Morningstar kept revising its fmv estimates lower so that I soon found myself holding stocks that I thought I was buying at deep discounts only to learn that Morningstar had revalued those stocks at substantial discounts from where I had bought them. It was frustrating.
Bank of America and St Joe are two stocks that stand out as examples of Morningstar drastically reducing its fair value calculations during the bear market. Morningstar also made big reductions for the stock market.
So today's 6% discount to fair market value may change as Morningstar reconsiders its calculations to adjust for a slowing economy.
Thanks for stopping by and making comment about your experience. I think this is an experience to share that some might not be aware of.
Morningstar's Fair Value Graph is not the only matrix I use to determine the value of the market. Most valuation methods remain in flux and are not a constant and with this are subject to change from time-to-time as conditions change within the markets, the companies and the economy themselves. Look at forward earnings estimates as they are indeed not a constant and most often get revised. Then there are also cash flow models and others methods such as technical analysis used by some for valuation. To keep it simple I'll continue with earnings.
Today full year forward estimates on the S&P 500 Index are at about $117.00; and, I have seen them as high in the mid $120.00's range this year. As of late most forward estimates are getting resived downward. Heck, I have seen the trailing twelve month earnings (TTM) fall thus far this year and at the close of 2014 they were at about $100.00 range for the S&P 500 Index and are now at about $97.00 range. To me, this speaks volumes about the recent market pullback (falling earnings).
As an investor in the stock market I know that I am buying earnings with every investment I make. With this, I put more weighting on the trailing twelve month earnings (TTM) for the market than I do on forward estimates as they seem get revised often and currently to be falling and are not expected to start rising again until sometime in the fourth quarter. I am looking for this to be a set up for a fall stock market rally especially since the market has been in recent decline. Will it happen? We want know until sometime after the fact. Remember, there are many things at play that could effect my current thinking both in a positive as well as a negative way.
To me investing is not an exact science as there are many factors that influence the stock markets price and these things, and more, put it in constant change. I think most seasoned investors know this but I can also understand there are perhaps some that don't.
As a long term investor I have seen good capital appreciation on most all of my investments through the years including the effects that have come from market pullbacks on valuations. At times, I have bought some investments that would go into the red not to long after I purchased them but when held for the long term I most always came out ahead. And, yes there have been a few that did not. However, for me and for the most part, I have found through the years that market pullbacks were a good time to put new money to work within my portfolio for both a long term investment perspective as well as for a special shorter term investment to play the swing. And, indeed your entry point will have great influence on the out come.
And, so it goes.
But tempermentally I'm more suited to @Old_Skeet's method: try to buy when prices are good, even if they'll possibly get still better and leave me with a paper loss, then hold for a long, long time. Since almost all my assets are in a taxable account, I've a further motive to keep trading to a minimum.
Thanks for stopping by and for making comment.
Pretty neat ... it seems and as you point out ... the graph can be used form both a momentum and value perspective.
Kind'a clever.
Either way, today's pe ratios are high, so risk is also.
Hi again Lawlar,
I think another thing that influences market prices is the use of leverage by big money and others. Some of these cats have direct link to the US Treasury through the Plunge Protection Team which was created by Ronald Reagan. With this prices get run up from what normal valuations would be along with associated P/E Ratios. I agree, from what I am finding through my study is that P/E Ratios are above normal. Now if big money feels interest rates are on the rise they are more apt to deleverage their positions and call their money home. I believe this is what has been happening somewhat this past week, or so.
I am providing a link for those that would like to follow the short money for SPY. If short positions start to rise then big money is most likely trimming their long positions and increasing their short positions. Anyway, that is my theory.
http://shortsqueeze.com/?symbol=spy&submit=Short+Quote
From review of the data provided in the link notice short interest has now deminished and the days to cover has been reduced by about 11%. This is telling me big money is starting to reduce short positions and perhaps starting to go long. Anyway, this is how I am reading the tea leaves, as I write, and with this I am anticipating a rebound in the markets coming soon.
And, as you have pointed out in your above opening comment ... little seems to be static when it comes to investing ... and, subject to frenquent change.
I'd be interested to know what others might think on this subject and comments are most welcome.
http://www.markets.fallondpicks.com/2015/08/near-term-oversold-s-and-russell-2000.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed:+FallondTradeHistory+(Fallond+Trade+history)
And, another perspective
http://seekingalpha.com/article/3460006-stocks-perspectives-on-the-selloff?source=feed_tag_editors_picks