Nosebleed, anyone? U.S. have hit the second most overbought level in history, according to Yahoo Finance contributor Dana Lyons, partner at J. Lyons Fund Management.
Lyons looked at the current level of the S&P Composite measured against its long-term monthly trend since records were available back to 1871.
For data, Lyons used inflation-adjusted S&P composite information from Yale economist Robert Shiller.
“Suffice it to say, the stock market is extended. Can it stay extended? The past few years prove that it can,” Lyons said in a Tumblr column picked up on Yahoo Finance.
The one time stretch in which stocks were even more overbought than now was during the November 1998-July 2001 time period, according to Lyons’ calculations.
“Outside of that period, stocks have never been this far above their long-term trend,” Lyons said.
“As it turns out, outside of the afforementioned 1998-2001 period, November 2014 marks the first month in its entire history that the S&P Composite is 90 percent above its long-term trend.”
Just because U.S. stocks are at such high level relative to history does not mean they will crash tomorrow, Lyons emphasized. But he suggested a bit of caution could be in order.
“I will only leave you with this: it likely is not the best time to commit a lot of long-term capital to the U.S. stock market,” Lyons said.
Economist John Hussman, a persistent critic of expansionist Federal Reserve policy, wrote in a similar vein in this week’s commentary on his Hussman Funds site.
“On valuation measures that are best correlated with actual subsequent S&P 500 total returns (and many popular measures are quite weak on that record), we presently estimate that the S&P 500 is about 115 percent above historical valuation norms,” said Hussman, founder of the eponymous mutual fund group.
Hussman predicts nominal total returns of less than 1.4 percent annually for the S&P 500 over the coming decade, with negative total returns over the next 8 years.
In his view, central banks will likely extend quantitative easing (QE) for many years to come.
“While QE might conceivably hold valuations at a higher plateau, we would still expect volatility – if more muted than in normal cycles – around it. My actual expectation is that the S&P 500 will lose half of its value over the completion of this cycle, but even if stocks have reached a ‘permanently high plateau’ it will likely include tradable departures from a diagonal line,” Hussman said.
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