Three More Charts That Give Me Pause

In my last post I wrote about the technical reasons to take a tentative stance in the stock market right now. Here are a few charts that make the fundamental case for caution.

1) The Shiller 10-Year P/E Ratio is back to a level only seen during past peaks (1929, 1966, 1995-2002). The green line represents one standard deviation above the long-term average 10-year price-to-earnings ratio of the S&P 500. In plain English, stocks should rarely be valued this high based on their earnings.

2) Relative to GDP the stock market is even more greatly overvalued. The following chart displays one of Warren Buffett's favorite general valuation metrics: total stock market capitalization as a percentage of gross domestic product. It clearly sends an even more dramatic message than the first.

3) The "Q Ratio" represents the value of the stock market relative to the replacement value of all of the underlying companies' assets. The current reading here looks very similar to the first chart I presented; stocks are currently breathing rarefied valuation air.

To boil it down, relative to earnings, revenues or assets, stocks are currently priced at levels that have proved to be, at best, unattractive, and, at worst, ruinous to investor portfolios in the past. This is a key macro point that guides my micro-investment decision-making.

Three Charts That Give Me Pause

I go through a list of about 100 charts every day, a habit I learned from Pit Bull. It's simply a quick way to gain perspective on the current state of the markets and scan for opportunities. Right now, the following three charts stand out in my mind and give me pause regarding the current bull run.

1) If the S&P 500 doesn't take out the May 1 highs soon it is clearly at risk of forming a head and shoulders top, perhaps the clearest and most widely known technical pattern:

2) The most likely culprit behind continued weakness, it would appear, would be the financials which have been lagging for months and are firmly entrenched in a downward channel:

3) In contrast, the tech-heavy Nasdaq made a new multi-year high yesterday but is now in danger of forming a broadening top:

All in all, this rally has now run for over 100% in just over 2 years without a major correction (20%+) to speak of. I'm not saying such a correction is imminent only that, in my estimation, betting on further gains carries more risk than at any other time since this bull began. And that's a risk I'm not willing to take.

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