Even after a 50% Drop, the S&P 500 Still Isn’t Cheap
Mar 6th, 2009 | By Charles Delvalle | Category: Chart of the DayYou’d think that after losing over half its value, the S&P 500 would be cheap. But you would be wrong, too, just by thinking that thought.
Source: Http://www.ritzholtz.com
This is a historical chart of the S&P 500’s Price-to-earnings ratio (P/E). For those that don’t know, a P/E ratio tells you how many years of a company’s earnings it will take to buy it outright.
So – if you buy a company for $1,000, and it earns $100 a year, you’re said to have a P/E ratio of 10 ($1,000 / $100).
In other words, it would take you ten years to break even (As a buyer).
Today, the S&P has a P/E of 12.6. But in the early 20’s, 30’s and late 80’s, this ratio dropped to as far as 5.
This can only mean one thing: Stocks have just entered fair value… the market as a whole isn’t even cheap yet!
The reason why is because we’re in a market where both earnings and stock prices are dropping dramatically.
This also means that shorting the S&P 500 as a whole is still a generally safe bet. You can do that by issuing a short-sale on the SPDR S&P 500 ETF (NYSE: SPY).
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Charles Delvalle is a self-taught market-timing professional and value analyst who's followed and invested in the market for the past ten years. He uses a unique combination of technical and fundamental research to pinpoint rapid profit opportunities with stocks and options.
Charles is also a staunch contrarian and takes pride in finding undervalued sectors and discovering undervalued, cash-rich companies. He frequently mocks government stupidities and points out the "inaccuracies (or lies, take your pick) that government reporting frequently dispels as "truth".
