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Stealth Bubble

  • Written by Syndicated Publisher No Comments Comments
    December 2, 2013

    A subscriber writes: Hello Carl. As a long-time subscriber (going back more than 10 years), I have a lot of respect for your historical P/E charts. However, when you recently wrote that stocks are high but not in a bubble, I’m wondering if perhaps you are not considering the stealth bubble discussed by John Hussman. (Click here to read Hussman article.)

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    (This is an excerpt from recent blogs for Decision Point subscribers.)

     

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    Carl’s Response: I don’t disagree with those, like John, who have different metrics to define a bubble. Personally, I don’t like what is going on one bit. Strictly speaking, I define a bubble as when prices have been bid up way beyond normal valuations — like what is happening (again!) in the real estate market.

    Prices are at an overvalued P/E of 20. That is sufficient reason for a bear market to begin. But I don’t consider it to be a bubble. (You say tomato . . .) Looking again at last week’s chart, we can see that, once prices reach the overvalued level, forward progress is normally halted and sharp corrections are the norm. The idea of a “stealth” bubble is not lost on me. The worst bear market ever (1929 to 1932) began once the market P/E reached 20, but the runup in prices was facilitated by a margin requirement of only 10%, certainly a major factor not seen on the chart. Today we have QEternity lurking behind the price line.

     

    SPPELOG

     

    This chart shows the S&P 500 Index (black line) in relation to its normal P/E range. A P/E of 10 is undervalue, a P/E of 20 is overvalue, and a P/E of 15 is considered to be fair value.

    Images: Flickr (licence attribution)

    About The Author – Carl Swenlin, Decision Point

    Carl SwenlinCarl Swenlin is a self-taught technical analyst, who has been involved in market analysis since 1981. A pioneer in the creation of online technical resources, he is president and founder of DecisionPoint.com, a premier technical analysis website specializing in stock market indicators, charting, and focused research reports. Mr. Swenlin is a Member of the Market Technicians Association.

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