I recently demonstrated that after the recent and massive rally in the stock market, stocks are no longer cheap relative to their earnings. Today, I came across the chart below (via The Big Picture) which looks at stock market valuation in a different way.
It compares the total value of all publicly-traded stocks to the country’s Gross Domestic Product. This is, in fact, Warren Buffett’s preferred method of evaluating the attractiveness of stocks, in general.
That’s the fundamental picture. However, I try to always marry the fundamental picture with the technical. I’ve been eyeing this next chart for the past couple weeks or so. It delineates the 50% time and price retracement of the bear market decline that began in 2007 (50% retracement is a popular technical measure among traders, especially Elliott Wave enthusiasts). 1121 on 11/21, ironically, is the line in the sand here:
1121 in price is the half-way point between the top (1576) and the bottom (666) of the bear market decline. 257 days is half the time of the decline; November 21st will mark the 257th day from the March 9th bottom. Hence, 1121 on 11/21. Interestingly, this projection lines up nearly perfectly with the bear market downtrend line.
This is not to say this rally will come to an end tomorrow (Saturday, the 21st, is not a trading day). My point is simply that both the fundamentals and technicals are lining up here to suggest caution is warranted.