John Hussman's Index: Stocks Are 13% Overvalued
11/26/2010 0 comments
John Hussman, manager of Hussman Strategy Growth Fund (HSGFX), proposed price to peak 10 year average earnings as a long term stock market valuation metric.
Compared with the normal one year price to earning ratio, Price to Peak Earnings would eliminate short term noise. This is similar to Shiller's ‘Cyclically Adjusted Price Earning’ ratio (CAPE10) and Warren Buffett’s stock market GNP/GDP metric.
In his weekly commentary on Dec 5, 2005, titled as 'Earnings Revert to the Mean, Stocks Will Struggle', he proposed a simplistic method: "buy when Price to Peak Earnings is lower than 15 and sell when it exceeds 19.5". John Hussman has been using this as the valuation yardstick to manage the Hussman Strategic Growth Fund HSGFX.
A model portfolio called P Hussman Peak PE Market Timing Strategy Buy 15 Sell 19.5 Weekly is also maintained to live monitor the strategy suggested in 'Earnings Revert to the Mean, Stocks Will Struggle'.
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On Nov 19, 2010, the ratio of Real Price to the average of last 10 year Peak Real Earnings (13.44) to its long term average (11.93) is 1.13. The US stock market is 13% overvalued.
We will be tracking this number biweekly.
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