The ValuEngine.com Valuation Model tracks more than 8000 U.S. equities, ADRs, and foreign stock, which trade on U.S. exchanges. The model calculates a level of mispricing or valuation percentage for each equity based on what the stock should be worth if the market were totally rational and efficient--an academic exercise to be sure, but one which allows for useful comparisons between equities, sectors and industries.
2011 was a very volatile year for the markets, and we essentially ended up right where we started in terms of the level for the S&P 500 (SPY). But 2012 has begun with a bang and the markets have rallied strongly based on better sings of recovery in the U.S. and yet another announced solution to the eurozone debt crisis.
Below, you can see that ValuEngine.com's Valuation Model no longer calculates that stocks are highly undervalued. We would have to say that our valuation figures for the overall market are now smack dab in the middle of "normal" range--40%-60% over or under. That's a pretty big change in just 6 weeks.
Stocks Undervalued by 20%
Stocks Overvalued by 20%
We also see a big change in valuation on a sector basis. Since January 1, we have gone from a mildly undervalued condition to double-digit overvaluation for many sectors. This is once again a sign that stocks are no longer a bargain as they were back in the Summer. In many cases--Tech, Finance, Retail--the valuation model is indicating that it is time to books some profits from the recent run up.
Computer and Technology
Here is a chart tracking undervaluation for the year as well as the various periods where we issued an overvaluation watch/warning in 2011. We had some market swings over the Summer, but since that last overvaluation watch in early May, the figures never really shifted out of what we would consider to be "normal" range--(40%-60%)-- until early August. Then, you see that as the market really swooned the Valuation Model switched over and found an extremely undervalued situation. We then began a fade back toward "normal" from October to the current day.
(Click chart to expand)
The ValuEngine.com Valuation Model adjusts to the underlying earnings figures and the interest rate environment so, despite the similarity in the Index level back in April/May of 2011--when we had an overvaluation warning on several occasions, we see a radically different valuation picture. Better earnings result in lower valuations given the same price levels and interest rate environment.
Now we see a market in which a bare majority of stocks are still calculated to be undervalued--but not as cheap as they were just a few months ago. The ValuEngine.com Valuation Model does not see an overvalued/overheated market just yet, but it is not seeing a bargain hunter's paradise out there either.