We use PE ratio (Price per Earning) to gauge whether the market is over value or under value. This information is helpful because it gives us an idea whether we should go long or go short with the market.
As a rule of thumb:
- PE = 15 is considered at fair value.
- PE < 15 is considered under value.
- PE > 15 is considered over value.
Summary of Major Stock Market Indices PE Ratio.