I don't know if others get the same feeling but stocks appear to be entering a dangerous zone. Valuation just doesn't seem to be attractive. This has been the case for more than year but now it's much worse IMO. The following chart from dshort.com of the 10-year cyclically-adjusted P/E (CAPE) ratio (aka Graham-Dodd P/E ratio) shows the present state (as of April 2011):
Some people don't believe in CAPE but I think it is a better measure than most. It can't be used to time anything in the short to medium term but it likely allows you to avoid the extremes.
CAPE of around 23 is quite high from a long-term historical point of view, although bulls argue that profit margins are higher now than the past and interest rates will be persistently lower.
Another rough indicator of valuation is to gauge the opinion of classic value investors (who follow the Benjamin-Graham-style of investing). Classic value investors tend to have very conservative, strict, criteria for selecting stocks and hence their investment universe tends to be a small sub-set of the whole universe. Most of their selections tend to be in penny stocks and microcaps. Many microcaps and smallcaps are trashy businesses with dubious corporate governance, poor profitability and/or long-term market strength.
If classic value investors see their universe shrink (i.e. market bids up the value of their stocks and out of their criteria range) then it is possible the market is reaching serious overvaluation. Rising tide tends to lift all boats, and when low-quality boats start rising, it may be time to avoid fishing in the ocean.
I notice some early signs from two classic value investors that their investment opportunities are drying up.
Jonthan Heller blogs at Cheap Stocks and tends to focus on stocks trading below NCAV (net current-asset value). He commented earlier in April that net-nets are "rarer than a blue moon."
Just when you think that the ranks of net/nets can't get any smaller, they do just that. This site was originally dedicated to the identification and research of companies trading below net current asset value, and at the time of launch in 2003, was the only site, at least that we were aware of, that covered net/nets.Jonathan Heller ascribes the rarity of net-nets to increased investor interest in the segment. No one is investing in these companies because they hot and popular. In fact, they are rarely ever mentioned in the press and hardly anyone will ever hear of them. If investors are seeking these companies, it is likely because investors are reaching for yield/returns anywhere they can. I would find it hard to believe that many are seriously interested in this segment.
Since then, interest has grown, and there are several websites that now cover net/nets. All of this coverage has brought the concept more into the mainstream. Ten years ago, net/net was a foreign term, even to some value investors. That's not so much the case any longer.
We believe that all of the additional coverage along with rising markets, have acted in tandem to reduce the universe of net/nets.
At ths writing, we can only identify 2 net/nets with market caps above $100 million, ADPT Corp (ADPT) and perennial net/net Audiovoxx (VOXX).
It's not much better between $50 million and $100 million. There, we find Myrexis (MYRX), Gencor Industries (GENC), Parlux Fragrances (PARL), Heely's (HLYS), Integrated Electrical Services (IESC), Trans World Entertainment (TWMC), and Planar Systems (PLNR).
We are starting to sound like a broken record, but that's the fewest number of net/nets we ever seen above $50 million in market cap.
ShadowStock also casually mentions how opportunities have dissapeared:
Leading Indicator ?: Scarce Supply of Deep Value OpportunitiesAll this is just anecdotal evidence but it pays to be cautious. Tags: market valuation
couple this with no real insider buying for value based micro cap stocks.
I’m not a macro base stock market prognosticator but I can’t ignore the data I’m working with and insider buying and deep value opportunities are far less available. Ben Graham spoke about this and recommended when lack of value opportunities become more obvious its time to think about asset allocations. He meant consider raising your cash level.
I’m not recommending raising cash but recently I’ve been developing techniques to mine data for short opportunities.