The stock market has been very agitating for the bears as the
SPDR S&P 500
) vaulted a remarkable 16% this year and 25% in the past 12
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
need to watch out for a correction.
1. Valuations are too high compared to the historic
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
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
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
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
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 (
), tracking the 100 largest non-financial stocks on the Nasdaq,
SPDR Dow Jones Industrial Average (
MSCI EAFE Index (
), tracking developed foreign markets: +7%
MSCI Emerging Markets Index (
Follow Trang Ho on Twitter