By Steve Blumenthal, CEO, CMG Capital Management Group
Valuation confusion is common in our business. Especially to the engineer, schoolteacher, doctor, business owner and pretty much everyone else (your client) who loves what they do yet looks at the market with sometimes dispassionate interest.
To sort through the confusion on valuation, I think Doug Short, Vice President of Research at Advisor Perspectives, did a great job of explaining where we are today (expensive stock market) and how investors should think about Price-to-Earnings valuation metrics.
The simple takeaway today is the market is expensively priced.
If buying investments when they are on sale vs. buying them when their prices are inflated can increase returns then we should view these valuation states differently.
From this perspective, it is wise to underweight and hedge equity exposure and overweight tactical strategy exposure until a point in time that valuations are low and owning equities becomes attractive once again.
Today, the forward expected returns (over the next 5, 7 and 10 years) are low and risk of a meaningful correction is high. A disciplined stop-loss (hedging) process may leave you in position to take advantage of further gains (should the market continue to advance) and importantly put you in a favorable position to preserve your capital enabling you to take advantage of the opportunities the next bear market will bring.
Some managers use simple moving averages (like a 200 day MA). I favor a 13 over 34 week EMA (exponential moving average) or a broader weight of evidence approach such as Ned Davis Research’s Big Momentum indicator. See weekly Trade Signals.
Here is the link to the full piece on valuation: Is the Stock Market Cheap? by Doug Short in Advisor Perspectives.
Steve Blumenthal is CEO and CIO of CMG Capital Management Group. The objective behind all of Mr. Blumenthal’s work is to help advisors build better portfolios by allocating with a long term game plan that is risk sensitive and properly diversified. Mr. Blumenthal is a self-proclaimed “quant geek” with an analytical mind for the markets that helps him connect with everyday investors and industry experts alike.