Much of the Stock Market at High Risk….

A heavy weight is overhanging the stock market, that weight is excessive overvaluation. Investors should pay careful attention to buy recommendations by brokerages, in the print media and on television as there have been far too many so called “experts” suggesting that buying the market can be done with little risk. A bear market will have brutal consequences. The various technical and fundamental gauges listed here would indicate a downside risk of between 28% to 32% which is what occurred when these gauges were at these levels in the past.

We have said many times “that odd as it may seem bull markets do not end due to overvaluation. They end with interest rates rising sharply, often with a decline in the money supply or a recession. We have not seen those indications as yet.   

   But keep in mind that dangerous market tops are usually accompanied by overvaluation and euphoria.” Are we seeing overvaluation and euphoria now? Yes and investors should be taking profits and continue to look for stocks that are undervalued. Again, some profits should continue to be taken off the table….as always.

While we usually are near fully invested in what our analysis indicates as undervalued stocks, we see high risk in many popular and highly recommended stocks selling at the high end of their price ranges. Yet, opportunities in stocks offering exceptional capital gains are always present, particularly in the numerous forgotten and overlooked stocks that the brokerage industry does not consider despite the fact that they are exceptionally undervalued.

The problem is that many high profile stocks continue to be recommended at the very high end of their valuation and price ranges; that will end sadly. The old standby rule is to focus on what is undervalued and not what is popular.

Note well! There are numerous companies and sectors that are quite undervalued that offer opportunities for exceptional capital gains. Moreover, our analysis suggests that we are slowly commencing a bull market in mining and commodities.

                                                                              WHY IS THAT?                                                                              Why does the brokerage industry rarely advise clients to wait for better buying opportunities at lower prices later on? Because it would force the brokerage industry to lose their much needed volume of business generating the needed commissions.

Moreover, the discount brokers such as Schwab, Fidelity, E-trade, National Bank, TD Direct, Desjardins Online and others have devastated the profitability of many of the full service brokers business. If investors don’t invest with full service brokerage houses, their earnings drop which has led to far less research coverage by the full service brokerage houses and a risky focus on too few stock recommendations.  

OFFICERS (OFFICERS) SELLING SHARES-VERY HEAVY… we now have an average of over $1 Billion in dollar value per month of insider sales of their own personally held shares in the companies where they are employed as senior officers and directors. One 2016 week saw their stock sales totaled an astounding value of $519,579,616 while buying was $39,746,064, quite a contrast. These levels of insider selling levels in the past have always been concurrent with the start of brutal bear markets such as in 2000 and 2008. Last week we saw a rate of 59 insider sales to 1 purchase. It is the highest we have ever seen….Fifty nine to one!

              WARNING….VALUE OF ALL STOCKS TO GROSS DOMESTIC  PRODUCT                                      The total dollar value of publicly traded U.S. stocks to U.S. Gross Domestic Production is now over 130%. The 2017 United States Gross Domestic Product (GDP) is approximately $17 trillion with the value today of all U.S. stocks at approximately $22.6 trillion. That computes to 134%. Some will suggest that in 2001 the value of stocks to GDP was higher therefore we can see much higher prices. Not really, since at that time the Nasdaq Composite was carrying a value of approximately $6 trillion which was incredible overvaluation.

That brought it up to the record 167% value of all stocks to GDP. However, if we use only use the S&P 500 which contains about 74% of the total value of the stock market, we are now at similar levels of 2000 and 2008 which preceded the last two bear market. While not a “timing signal,” bear markets commenced from these overvalued levels in 2000 and again in 2008. 

Price to sales ratio This is a very valuable gauge as it offsets any gimmicks and accounting tricks that are used to enhance financial results. It is a company’s share price divided by the sales per share. For example, if the value of a company’s shares is $2 million and its gross sales are $1 million, the price to sales ratio is 2 which is wildly overvalued. That is where the market is today. It is the highest level ever. It would benefit investors to pay attention to these very unsettling indicators.