Warren Buffett sold 100 million shares of Apple stock recently and while taxation was supposedly the main driver of the decision, it wouldn’t surprise me one bit if the entire stock market corrected 20 to 40 percent over the next 12 to 18 month.
You Gotta Know When To Hold’em
I consider myself primarily a value investor so I like to invest in ETFs and stocks when I consider the equity to be a good value. So how does one know when the market if over valued, and you should sell, or under valued and you should buy?
Buffett Indicator Valuation Model
For a broader general market valuation, I like to visit www.currentmarketvaluation.com and browse through different indicators such as the Buffett Indicator which is the ratio of total stock market value to GDP. According to the Buffett Indicator the market is currently highly over-valued at 199 percent!
Price/Earnings Ratio Valuation Model
Another indicator is the P/E ratio indicator which measures a stock’s value indicating how many years of profits, at the current rate, it will take to recoup an investment in the stock. According to the currentmarketvaluation.com, the P/E ratio indicates the market is 70% over the modern era ratio of 20 suggesting an over-valued market.
10 Year Interest Rate Valuation Model
A third indicator is the 10 year interest rate valuation model. Nearly everyone has been expecting a recession since the Fed raised rates 500% over the past 18 months but we don’t have a recession yet. According to the interest rate model, the stock market is over-valued.
Mean Reversion Model
Lastly, the mean reversion model indicates the market is over-valued. I won’t explain it here but if you’re interested in this model, there are nice diagrams and explanations here.
Know When To Fold Them
According to all the models, the market is over-valued and has been for some time. What will it take for the market to correct back to ‘normal’ valuation? I don’t know what the trigger will be but I have a list of suspects: debt, inflation, spiking bond yields, recession, bank runs, war, oil, civil unrest.
The best thing (for me) to do now, is sit mostly on cash and T-bills. I will continue to do so until the market corrects or I find tremendous value in an index or stock.