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ValuEngine: Market Overvaluation Up Significantly

Watch Out ValuEngine: Market Overvaluation Up After Trump Victory

ValuEngine tracks more than 7000 US equities, ADRs, and foreign stock which trade on US exchanges as well as @1000 Canadian equities. When EPS estimates are available for a given equity, our model calculates a level of mispricing or valuation percentage for that equity based on earnings estimates and 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. Using our Valuation Model, we can currently assign a VE valuation calculation to more than 2800 stocks in our US Universe.

We combine all of the equities with a valuation calculation to track market valuation figures and use them as a metric for making calls about the overall state of the market. Two factors can lower these figures-- a market pullback, or a significant rise in EPS estimates. Vice-versa, a significant rally or reduction in EPS can raise the figure. Whenever we see overvaluation levels in excess of @ 65% for the overall universe and/or 27% for the overvalued by 20% or more categories, we issue a valuation warning.

We now calculate that 63% of the stocks to which we can assign a valuation are overvalued and 30.63% of those stocks are overvalued by 20% or more. These numbers have increased significantly since we published our last valuation study at the beginning of October.

If the levels increase just two percentage points, we will issue our first valuation warning since June, 2015. At that time, the SP500 was at the 2100 level. Needless to say, from our model's perspective, equities are nowhere near as "cheap" as they were back in late June of this year in the aftermath of "Brexit."

The last big surprise for stocks was the unexpected Trump election victory. We saw panic selling in the immediate aftermath, but the markets shook that off and since the election major indices have all laid in new record highs or are flirting with record territory. Small caps--the Russell 2000 index--have performed particularly well.

Again, the Trump victory, like the "Brexit," briefly shook markets, but markets came roaring back. We still expect some long-term negative effects from both events, but for now we recognize again that following cries of panic based on short-term noise is NOT the right thing to do.

We believe that the latest market run up, along with the continued good employment data, makes it more likely that the Fed will raise rates at its next meeting in December. Of course, we believe they should delay until we really see workers benefitting from the improved economic environment. It would be a shame to move to soon when inflation remains in check.

The chart below tracks the valuation metrics so far this Summer/Fall. It encompasses the Brexit sell off. It shows levels in excess of 40%.

The chart below tracks the valuation metrics from August 2015. It shows levels in excess of 40%.

This chart shows overall universe over valuation in excess of 40% vs the S&P 500 from August 2013

This chart shows overall universe under and over valuation in excess of 40% vs the S&P 500 from March 2007*

*NOTE: Time Scale Compressed Prior to 2011.

ValuEngine Market Overview






Summary of VE Stock Universe
Stocks Undervalued 37%
Stocks Overvalued 63%
Stocks Undervalued by 20% 15.83%
Stocks Overvalued by 20% 30.63%


ValuEngine Sector Overview

















Sector Change MTD YTD Valuation Last 12-MReturn P/E Ratio
Multi-Sector Conglomerates 0.57% 3.48% 9.80% 21.88% overvalued 3.28% 19.20
Industrial Products 0.71% 7.08% 23.15% 20.50% overvalued 15.22% 23.82
Aerospace 0.61% 5.69% 10.31% 16.23% overvalued 11.66% 19.20
Oils-Energy 2.30% 3.37% 35.87% 14.37% overvalued 6.35% 26.18
Construction 0.43% 6.64% 31.92% 13.17% overvalued 14.73% 21.03
Transportation 0.50% 9.51% 16.71% 13.16% overvalued 0.32% 19.18
Computer and Technology 0.24% 4.83% 20.61% 12.16% overvalued 8.45% 29.65
Finance 0.24% 6.00% 12.34% 11.37% overvalued 6.82% 16.89
Business Services 0.58% 6.79% 19.54% 10.24% overvalued 2.82% 24.61
Basic Materials 0.88% 3.92% 50.32% 9.06% overvalued 63.96% 28.17
Consumer Discretionary 0.18% 3.90% 9.72% 6.99% overvalued 8.53% 23.82
Retail-Wholesale 0.01% 5.19% 1.78% 5.83% overvalued 4.04% 23.13
Utilities 0.79% 0.74% 12.19% 5.42% overvalued 9.71% 21.56
Consumer Staples -0.02% 0.32% 7.52% 3.26% overvalued 7.45% 24.16
Medical 0.02% 3.95% 1.12% 1.23% overvalued -9.60% 26.37
Auto-Tires-Trucks 0.65% 3.54% 8.97% 1.07% overvalued 13.52% 14.45 is an independent research provider, producing buy/hold/sell recommendations, target price, and valuations on over 7,000 US and Canadian equities every trading day.
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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.