June 1, 2010 – How Overvalued Are Stocks?

(SPECIAL MARKET TIMING ISSUE)

Featured Trades: (DOW)


2) How Overvalued Are Stocks? The chart below was passed on to me by a reader showing an inflation adjusted Dow since 1900. Bulls may be forgiven for getting that kicked in the scrotum feeling because it shows the index is 3,000 (43%) points higher than trend. I can buy the argument that a surge in stock prices which started in 1990 was brought on by the rapid diffusion of first computers, and then the Internet, during that hectic, volatile decade. The only explanation I can think of for the past decade is artificially low interest rates, which we still have. Moral to the story: watch out when those low interest rates depart for other regions. Reversion to the mean can be a bitch.

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