Six ratios say this market is very overbought

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By Mark Hulbert, MarketWatch.

 

The U.S. stock market is more overvalued than it was at the majority of the past century’s peaks, according to six well-known valuation ratios.
That doesn’t mean the bull market is coming to an end, of course, since some past bull markets were even more overvalued when they topped out. Furthermore, no two market peaks behave the same way.
2014 Stock Market Overbought

Nevertheless, the evidence suggests that risks are high. You may want to consider selling some of your stock holdings and building up cash.

 

To compare current valuations to those that prevailed at past market tops, I relied on a comprehensive list of past bull-market tops compiled by Ned Davis Research. The list is based on a set of criteria focusing on the speed, magnitude and length of market movements.According to the firm, there have been 35 bull-market tops since 1900. The Dow Jones Industrial Average lost an average of 31% in the bear markets that followed.Here’s how the market stacks up to past market tops according to these six valuation ratios.

  1. Price/earnings ratio. Calculated by dividing stock price by earnings per share, this is perhaps the most widely followed of all valuation ratios. Based on the previous 12 months’ earnings, the S&P 500’s current P/E ratio is 18.6, which is higher than those that prevailed at 24 of the 35 bull market tops since 1900. (Data before 1957 are for the S&P Composite Stock Index, since the S&P 500 didn’t exist yet.)
  2. Cyclically adjusted P/E ratio. This is the version of the P/E championed by Yale University Professor Robert Shiller, the recent Nobel laureate in economics. It is calculated by dividing a company’s stock price by the average of its inflation-adjusted earnings of the preceding decade. For the S&P 500, this ratio currently stands at 25.6, which is higher than what prevailed at 29 of the 35 tops since 1900.
  3. Dividend yield. This is the percentage of a company’s stock price that is represented by its total annual dividends. Since this yield tends to fall as prices rise, and vice versa, the market should register some of its lowest readings near its tops. The S&P 500’s yield currently stands at 2.0%, which is lower than the comparable yields that prevailed at all but five of the bull-market tops since 1900.
  4. Price/sales ratio. This is calculated by dividing a company’s stock price by its per-share sales. Though it is lesser known, it still is championed by many investors because it is based on data that are less susceptible to manipulation than earnings. For the S&P 500, the price/sales ratio currently stands at 1.6, which is higher than the comparable readings that prevailed at all but two of the bull market tops since 1955, which is how far back data are available.
  5. Price/book ratio. This is another lesser-known valuation indicator, calculated by dividing a company’s stock price by its per-share book value—an accounting measure of net worth. For the S&P 500, this ratio currently stands at 2.7, which is higher than all but five of the 28 bull-market tops since the mid-1920s, which is how far back data are available.
  6. “Q” ratio. This indicator is based on research conducted by the late James Tobin, the 1981 Nobel laureate in economics. It is similar to the price/book ratio, except that book value is substituted by the replacement cost of assets.

Mr. Tobin thought this to be superior since he considered replacement cost to be better reflection of a company’s net worth than book value, which is based on assets’ original cost — no matter how far in the past those assets were acquired.

The Q ratio currently is higher than what prevailed at 31 of the 35 past market tops, according to data compiled by Stephen Wright, an economics professor at the University of London, and Andrew Smithers, founder of the U.K.-based economics-consulting firm Smithers & Co.
While each of these valuation ratios has its detractors, it is noteworthy that all six of them are currently telling a similar story. It is also worth noting that a particularly bearish message is coming from the two that, according to Messrs. Smithers and Wright, have the best historical track record — the Q ratio and the Shiller P/E.
If you agree with this bearish assessment, you should be thinking of ways to build up cash in your portfolio. At a minimum, you shouldn’t automatically reinvest the proceeds when you sell any existing stock positions.
Market timing is notoriously difficult, however, so you might choose to stick with your stock positions through thick and thin. In that event, you could still begin to shift your stock holdings toward sectors that historically have performed the best near the end of a bull market.
According to Ned Davis Research, those sectors tend to be consumer discretionary and consumer staples. Two exchange-traded funds benchmarked to those sectors are the Consumer Discretionary Select Sector SPDR XLY +0.45%  and the Consumer Staples Select Sector SPDR XLP +0.78% . They both charge annual fees of 0.18%, or $18 per $10,000 invested.
Here are the stocks in these two sectors that are most popular right now among the advisers tracked by the Hulbert Financial Digest who have beaten the stock market over the past 15 years: satellite-television provider DirecTV DTV -0.28% ; entertainment giant Walt Disney DIS -0.31% ; Kimberly-Clark KMB -.00% , the consumer-products company; fast-food giant McDonald’s MCD -1.18% ; drug distributor McKesson MCK -.00% ; PepsiCoPEP -0.80% , the beverage company; and Philip Morris International PM  -1.41% , the cigarette manufacturer. 

Mark Hulbert is the founder of Hulbert Financial Digest in Chapel Hill, N.C. He has been tracking the advice of more than 160 financial newsletters since 1980. Follow him on Twitter @MktwHulbert.

 

Extract from Marketwatch

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Fossil Inc (FOSL) Trade Idea

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Fossil Group Inc (FOSL) Details

Fossil Group, Inc., together with its subsidiaries, engages in the design, development, marketing, and distribution of consumer fashion accessories worldwide. It operates in four segments: North America Wholesale, Europe Wholesale, Asia Pacific Wholesale, and Direct to Consumer. The company provides men’s and women’s watches; fashion accessories for men and women, including handbags, belts, small leather goods, jewelry, and sunglasses; and a line of soft accessories consisting of hats, gloves, and scarves. It also offers clothing, such as jeans, outerwear, fashion tops and bottoms, and tee shirts, as well as optical frames. The company offers its products under its proprietary brands, including FOSSIL, MICHELE, RELIC, SKAGEN, and ZODIAC, as well as under the licensed brands consisting of ADIDAS, ARMANI EXCHANGE, BURBERRY, DIESEL, DKNY, EMPORIO ARMANI, KARL LAGERFELD, MARC BY MARC JACOBS, and MICHAEL KORS. Fossil, Inc. markets its products through department stores, specialty retail stores, specialty watch and jewelry stores, retail and outlet stores, mass market stores, and clothing stores, as well as through its catalogs and Website. As of December 29, 2012, it owned and operated 131 retail stores and 95 outlet stores located in the United States, as well as 185 retail stores and 62 outlet stores internationally. The company was formerly known as Fossil, Inc. and changed its name to Fossil Group, Inc. in May 2013. Fossil Group, Inc. was founded in 1984 and is headquartered in Richardson, Texas.

 

Chart Pattern:

FOSL retraced back to 61.8% Fibonacci Retracement Level and rebound from the up trend support at about $113. This uptrend support line coincides with 200D SMA which is trending up. Technically the chart is bullish.

FOSL Jan15-2014

FOSL Implied Volatility

FOSL IV Jan15-2014

FOSL Fundamental

FOSL Jan15-2014 Fundamental Analysis

Option Trading Strategy:

1st Phase: Short Put Spread (Bullish Setup) at about $115 – $117

  • STO FOSL Mar 14 115 Put
  • BTO FOSL Mar 14 110 Put

2nd Phase: to open Short Call Spread to make it Iron Condor 110/115/135/140 to sell Vega (Volatility) before Earning Date: Feb 11 AMC if FOSL still stays between $115 & $135.

  • STO FOSL Mar 14 135 Call
  • BTO FOSL Mar 14 140 Call

Exit Plan:

Expect IV to drop drastically after earning and close the Iron Condor after the IV drops.

 

Original post by Marubozu @ My Stocks Investing Journey.

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