Wednesday, October 19, 2011

Chart of the Day - S&P 500 PE ratio at 21-year lows

Folks, there's an interesting chart made available last Friday by Chart of the which I think you'll want to consider. It relates to price-earnings ratio of the overall stock market. It clearly shows how the market had become seriously overbought. But notice that, even though the P/E ratio came way down, it still isn't near oversold territory. Maybe price can rebound more, but at some point it'll get back to the oversold line. Looks like there may be a 30-year cycle, that could have a trough low within a couple years or so... Think about that as you read what "Chart of the Day" presents here:

Chart of the Day - S&P 500 PE ratio at 21-year lows
Today's chart illustrates how the recent rise in earnings as well as the recent stock market action has impacted the current valuation of the stock market as measured by the price to earnings ratio (PE ratio). Generally speaking, when the PE ratio is high, stocks are considered to be expensive. When the PE ratio is low, stocks are considered to be inexpensive. From 1900 into the mid-1990s, the PE ratio tended to peak in the low to mid-20s (red line) and trough somewhere around seven (green line). The price investors were willing to pay for a dollar of earnings increased during the dot-com boom (late 1990s), surged even higher during the dot-com bust (early 2000s), and spiked to extraordinary levels during the financial crisis (late 2000s). As a result of the recent spike in corporate earnings as well as relatively lower stock prices (e.g. the S&P 500 currently trades 11.7% off its April 2011 post-financial crisis highs) the PE ratio has dropped to a level that has not existed since 1990.

- Where's the Dow headed? The answer may surprise you. Find out right now with the exclusive & Barron's recommended charts ofChart of the Day Plus.

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Quote of the Day
"Value (like beauty) is in the eye of the beholder." - Dean Lebaron

Events of the Day
October 24, 2011 - United Nations Day

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