Can be overrated a bit

Third highest overvaluation in the last 130 years

The American stock market is grossly overvalued and therefore expensive. It could still go up for months. However, investors should be careful. What you should know now.

There is no silver bullet when it comes to investing. However, there are some important rules that investors and speculators should follow. One of them is: "Minimize your losses!" High losses can cost an investor dearly because they are usually difficult or only compensate for over a long period of time. If an index (or a share) falls by 25%, it (or she) has to rise by a good 33% in order to reach the initial price again. If a stock barometer (or an individual value) falls by 50%, a profit of 100% is even necessary to get back to the starting point. In order to avoid major corrections or even crashes, investors should know how to avoid losses and where the market is roughly in the current cycle - whether it is expensive or cheap.

Beware of the death cross

To protect against large losses, it is best to have fixed rules so that investors do not fall for their emotions. Probably the simplest rule is to use two moving averages. The models with the 200-day line and the 50-day line (golden cross system) are popular. If the 50-day line intersects the 200-day line from top to bottom, this is a sell-signal, which is known in the jargon as the "death cross". In the opposite case, when the 50-day line crosses the 200-day line from bottom to top, a buy-signal is generated in the form of a golden cross. With this simple rule, investors could have avoided the great losses of the past decades if they had left the stock market after the appearance of a "death cross" and stayed away from the market until the appearance of a gold cross.

In addition, investors should be aware of the phase in which the market is likely to be in the interplay between bull and bear - otherwise there is a risk of a rude awakening. Investors who entered the stock market shortly before the Great Depression at the end of the 1920s suffered a loss of 84% as a result of the crash. It took almost 13 years for the stock market to compensate for this near-total loss by rising 525%. Anyone who had decided to invest in the years 2000 or 2007 near the height of the euphoria on the stock market would also have been very unlucky. A short time later, a violent crash also followed.

Starting from the last low during the financial crisis in March 2009, the American stock market has now enjoyed an eight-year boom. This is already one of the longest bull markets in history. For this reason alone, it pays to be careful. In addition, the stock market is comparatively highly valued. Measured against the so-called Shiller P / E - which is often referred to as the cape (Cyclically Adjusted Price Earnings), the broad American S&P 500 index is valued at almost 30 points, as high as only twice previously in the past 130 years. At the end of the 1920s, the ratio rose to around 33 and in the context of the New Economy boom in 2000 to around 45. The Shiller P / E ratio is based on the inflation-adjusted mean consolidated earnings of the last ten years. The key figure was popularized by the US economist Robert J. Shiller from Yale University. However, the idea goes back to the well-known investment strategists Benjamin Graham and David Dodd.

So investors have every reason to be vigilant. However, the example from 2000 in particular also shows that even a strongly overvalued stock market can continue to rise for months, if not years, and achieve a far higher overvaluation. There is always criticism of the Shiller KGV. Currently, for example, one is that it captures the data from the financial crisis, when many companies had to cope with a massive slump in profits. However, the very idea behind the key figure is to compensate for boom and bust phases over ten years. What would happen if the Shiller KGV were not used for ten years but only for five years? There has been no recession in the US in the past five years. According to the experts at Ned Davis Research, one would come to the conclusion that the stock market would then be less overvalued, but the valuation would still be in the top fifth of the past 100 years or so. However you turn things around, namesake Ned Davis is convinced that the market is overvalued.

No happy months from May

While the overvaluation of the stock market is significant and risky, there is no reason for a panic exit. The prevailing upward trend is intact at all time levels. Many US indices recently even hit a new record high, which is a sign of strength per se. However, due to the marked increase since Donald Trump was elected as American president, many observers no longer believe the indices have too much upside potential. In addition, the market is entering a seasonally typically weak phase. From a statistical point of view, the months May to October do not belong to the happy months on the stock market. In this respect, the risk-reward ratio on the stock market currently appears to be unattractive.