S2 Option Trader

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Long-term acid test - valuations

There's more than one way to make potato salad, but as long as you're using potatoes you'll still get potato salad.

There is more than one way to value the market, but as long as you are using current valuations - not future or projected values - you will find that the market is overvalued.

According to Yale Professor Robert Shiller, the long-term average price/earnings (P/E) average is around 16 xs. Prof. Shiller uses a cyclical adjusted P/E. With the S&P (NYSEArca: IVV - News) around 1,170, stocks have a P/E of 21. According to Shiller's analysis, stocks are 30% overvalued.

Using unadjusted P/E ratios published by Standard and Poor's (www.standardandpoors.com), the P/E ratio based on actual earnings spiked above 100 briefly before settling at 84 at the end of 2009.



As the chart below shows, the historic pattern is that P/E ratios have to reach rock bottom to trigger a sustainable bull market, such as we've seen in the 1930s, 1950s, 1970s, and 1980s. The current P/E is far away from bull market territory
http://finance.yahoo.com/news/Is-The-New-Bull-Market-For-etfguide-4044445307.html?x=0