5 Contrarian Warning Signs Stock Market Is Too High


The stock market has been very agitating for the bears as the SPDR S&P 500 ( SPY ) vaulted a remarkable 16% this year and 25% in the past 12 months.

Like a broken clock that's right twice a day, the bears will eventually stand atop the podium. Here are five warnings signs the bears believe the stock market is excessively overvalued and that investors need to watch out for a correction.

1. Valuations are too high compared to the historic average.

The 10-year trailing price-to-earnings ratio on the S&P 500 is 24.2 as of Tuesday vs. an average of 16.5, based on market data going back to 1900, according to TrimTabs Investment Research. The S&P trades at 16 times forward earnings but that's because analysts' estimates are too positive, said David Santschi, CEO of TrimTabs. The Federal Reserve's quantitative easing, or money printing program, has been the main driver this year, he said.

2. The S&P's dividend yield is too low.

The higher prices go, the lower the yield. The S&P 500 currently shows a dividend yield of 1.94% vs. an average of 4.5% since 1900, according to Santschi. The yield is flirting with its record low of 1.1% last seen in August 2000 -- near the height of the tech bubble.

3. The market is too big relative to the economy.

The current value of the U.S. stock market totals $18.79 trillion while the U.S. gross domestic product (total of all goods and services) weighs in at $16.07 trillion. The stock market's value currently amounts to 117% of GDP, according to the June "Lamensdorf Market Timing Report." Readings above 72% are considered overvalued and 87% is considered "bubble territory."

The ratio edges close to its pre-financial crisis, 2007 high of about 130%. At the height of the tech bubble, the stock market-to-GDP ratio was a record 169%. At the trough of the market in 2009, the ratio was considered undervalued at 60%.

"Simultaneously, the national savings rate as a percentage of GDP is at a multi-decade low," the report stated. "People continue to be stretched as their savings rate is insufficient to weather an economic downturn. There are inadequate reserves left to fuel any further expansion."

4. Contrarian sentiment indicators show the crowd is overly bullish while corporate insiders are very bearish.

The NYSE Bullish Percent indicator, a primary risk indicator, currently shows a reading in the mid-70s, suggesting "an extremely fully valued market. Any number over 70 has a low risk-to-reward ratio of positive returns," the Lamensdorf report stated.

The Insider Sell/Buy Ratio shows there are nearly eight corporate insiders selling for every one who's buying. This suggests corporate insiders -- those who know the most about their companies -- see weakness ahead.

5. New stock offerings hit a two-year high of $37.7 billion in May.

There's too much supply of shares while demand wanes. "The extra supply of stock offerings is negative because it adds additional supply to stock market capitalization," the Lamensdorf report stated. "The bearish Insider Sell/Buy Ratio, combined with an excessive supply of stock offerings, is a warning signal from a risk manager's perspective."

Year-To-Date Returns Of Major Indexes

PowerShares QQQ ( QQQ ), tracking the 100 largest non-financial stocks on the Nasdaq, +13%

SPDR Dow Jones Industrial Average ( DIA ): +17%

iShares MSCI EAFE Index ( EFA ), tracking developed foreign markets: +7%

iShares MSCI Emerging Markets Index ( EEM ): -10%.

Follow Trang Ho on Twitter @TrangHoETFs .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

This article appears in: Investing , ETFs

Referenced Stocks: DIA , EEM , EFA , QQQ , SPY

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