Shiller Index Close to Triggering a Move to Bonds
12/22/2010 0 comments
Yale Professor Robert Shiller has devised and maintained his Cyclically Adjusted Price Earning ratio (CAPE10) as an alternative to the PE ratio to value the US stock market. CAPE10 is defined as the ratio of price to the average of last 10 year trailing S&P 500 annual earnings.
On Nov 26, 2010, the ratio of Real Price to the average of last 10 year Real Earnings(CAPE10)(22.47) to its long term average (16.38) is 1.37.
On Dec 17, 2010, the ratio of Real Price to the average of last 10 year Real Earnings(CAPE10)(23.5) to its long term average (16.38) is 1.43. US stock market is 43% Over Value. Historical Chart
We note that the ratio is increasing as equities increase and the ratio is moving towards significantly over valued. This is covers in more detail in Shiller Cyclically Adjusted PE 10 Stock Market Timing Strategy.
We also note that the strategy that uses the Shiller index to swap between equities and bonds is close to coming into effect.
This would suggest a defensive portfolio with a significant portion of the assets in fixed income or cash.
Both the Shiller and Hussman indices suggest that the market is over valued but the Buffet index suggests otherwise.
This hints at the dilemma in the market where investors are nervous about equities but also concerned about bonds.
We will continue to track this index and strategy to see whether the switchover trigger proves to be well founded.
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Symbols:SPY,QQQQ,IWM,MDY,EFA,VEU,EEM,VWO,IYR,ICF,VNQ,GSG,DBC,DBA,USO,LQD,CSJ,CIU,HYG,JNK,PHB,TLT,IEF,SHY,SHV,BND,AGG,MUB,MBB,
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