Wednesday, 1 March 2017

After record-breaking run, are US stocks cheap or ripe for correction?

Markets were mixed on Tuesday.

The S&P 500 fell 0.3 percent but the STOXX Europe 600 rose 0.2 percent and the Nikkei 225 rose 0.1 percent.

US stocks fell after hitting record highs on Monday.

Despite its record-breaking run, Peter Morici, economist and professor at the Smith School of Business of the University of Maryland, thinks that the US stock market is cheap.

Morici said that while the market P/E ratio is approaching 27, “factoring in expected profit growth over the next 12 months, the P/E ratio falls to about 18”.

Morici thinks that a P/E ratio approaching 35 is “reasonable” and that the S&P 500 could hit “3200 over the next two or three years”.

Indeed, Thomas Kee Jr at MarketWatch noted that when the stock market hit record highs on Monday, it “broke above near-term, mid-term and longer-term resistance levels”. As a result, “there are no resistance levels at this particular time”.

Kee also noted that despite the break-out, the market is not signalling an overbought condition as some stocks have been left out of the rally.

On the other hand, a report from Vickers Weekly Insider showed that insider selling in US corporations have jumped “to levels rarely seen” which would, according to Vickers analyst David Coleman, “seem to imply that equities might be ripe for some level of correction”.

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