Those assumptions can help form a “guess,” assuming similar variables, about how they may act in the near term. From that study, we can make statistical observations about the behavior of market participants in the past. It is the study of historical price action, which is the purest representation of the psychology of market participants. Notably, technical analysis does NOT predict the future. I am only going to discuss with you how we do it. In addition, there are millions of combinations of technical indicators that investors use to try and decipher market movements. When it comes to technical analysis, there are millions of different ways to approach it. Valuations do matter, and they matter a lot. Such is a dangerous assumption and one that investors paid dearly for in the past. It is this “lag” that leads investors in the short-term to believe that “valuations” no longer matter. However, given this is monthly data, these turns can take much longer than expected. Looking at the chart, it indeed suggests that investors should be selling everything immediately. Currently, at 40x earnings (Shiller’s CAPE ratio), there is little argument that investors are just about as bullish as they can get. In the long term, they tell you everything about expected returns.Ĭurrently, every measure of valuation suggests investors have thrown all “caution to the wind.”Īs noted, valuations are a reflection of investor psychology. Valuations are a terrible market timing indicator. However, in the short term valuations tell you everything about market psychology. As we have discussed in “Pet Rocks & Other Signs:” In the short term, all that matters is price. So, back to our email question, how do we trade this “off-the-charts” bull market? The Problem With Valuations The unknown question, of course, is for “how long.” The belief, currently, is that the massive reservoir of liquidity from both Governments and Central Banks can keep valuations inflated. We get the trade, as we do in Crypto, but we do dare ask if valuations can continue to defy gravity. Lots happened in the 1990s, the internet, the return of the emerging markets post debt crisis, the rise of China (probably the most important factor), the end of the Cold War, and some massive sovereign bailouts. Before the mid-1990s, valuations traded in a nonvolatile range of around 50 percent of GDP. Note the structural shift, which took place around 1995. Take a look at today’s stock market valuation. “Bezos, Musk, and Branson (BMB) are not the only ones recently touching the earth’s thermosphere for a brief and shining moment. However, let me start with an excellent note from Global Macro Monitor, ironically entitled “The Off-The-Charts Bull Market.” That was an email question I got last week that deserves a deeper explanation. “How do you trade this off-the-charts bull market?”
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