Market Notes: Is The Market Getting Too Hot? -- July 12
The market ground higher again today with the S&P and the Russell 2000 closing at record highs. The low VIX is also giving the bulls something to cheer about. You'd think the bears would have gone back into hibernation by now but they're still making their presence know. Despite the rally in the S&P, Nasdaq, and the Russell 2000, today was a down day for the transports. Not that one down day is enough to spoil the party but add to that the fact that the Dow Industrial Index hasn't been able to close above 15500 and you can see why the bears are hanging around.
Valuations as well are beginning to get a little lofty. The historical mean P/E value on the S&P is 15.5 (the median is 14.5). The current P/E value stands at 19.4 meaning that this earnings season will be closely watched. If earnings come in lower than expected, a drop in the market will be the likely outcome.
Trade Idea: Is your portfolio becoming overvalued?
We just noted above that the market is tilting towards the over-valued side. Now would be a good time to review your holdings to see if any of them are becoming too hot to handle. One way to know is to compare their valuation metrics against their peers. Different metrics are applied to different industry groups--just going by the P/E ratio is very often not an accurate reflection of a company's true health. For example, when considering biotechs and big pharma, you may wish to look at the robustness of their drug pipelines; in retail, same store sales and foot traffic growth are indications of how well the company is doing. Do your due diligence and find out what metrics are pertinent to your stocks. Then compare them against those of their industry peers. If you feel your company's stock price is getting rich, it would be wise to either lighten up your position or take out portfolio insurance (either by buying puts on individual stocks or puts on the index tracking stock that most reflects the make up of your portfolio).
Just a little weekend activity to balance out all the fun from backyard barbecuing and spending the day dozing on the beach.
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