Thursday, May 21, 2009

S&P500 Price/Earning at 122.45

Is 122 high for P/E? Hell yeah it is! Any individual stock with P/E greater than 30 becomes easily considered "over bought" by many institutional traders.

While the public remains cluelessly optimistic from the rally past few months, corporate earnings have dropped like a ship from heaven. The stock market has become well over priced. Time to wake up and smell the coffee!!!



The most basic measure of stock market value is price relative to the latest 12 months' earnings - the P/E ratio. In bear markets, investors terrified by bad news can drive the S&P 500 P/E ratio to under 10. In the 1974 bear market, this ratio dropped to 8 with many securities trading with even lower multiples. In bull markets, extreme optimism can drive the market's P/E to 25. In the 1995 bull market, many technology stocks were valued at over 50 times their prior 12 months' earnings, while the ratio for the S&P 500 fluctuated between 16 and 20.

Calculation & Significant Levels

S&P 500 Price/Earnings Ratio: Calculated by dividing the earnings over the latest 12 months' of the S&P 500 Index into the cash price of the index. A market P/E of 18 or higher is usually considered a sign of overvaluation. When the S&P 500 P/E drops below 10 the market is historically undervalued.

Description Source: Market Gauge

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