101 Reasons the Market Looks Overheated Todayhttp://www.fool.com/investing/general/2010/12/15/101-reasons-the-market-looks-overheated-today.aspx Toby Shute
December 15, 2010
Please raise your hand if some of the stocks you own have gone up a lot recently. Mmmhm. Yep, that looks like just about everyone. OK, you can put your hands down.
I'm all for straw polls, but just to investigate this phenomenon with a bit more precision, I've conducted a screen for stocks listed on major U.S. exchanges that have more than doubled, on a dividend-adjusted basis, since the end of August. As of Monday, a pretty amazing 101 stocks make the cut. That's way above normal for this slice of the calendar year. You have to look back to 2003 to find a comparable result.
As in 2003, the economy is officially out of recession, and the stock market has come roaring back. Again, there are lingering problems. Back then, there were early signs of a housing bubble. Now we're arguably dealing with a sovereign debt bubble. Again, valuations appear too high. In late 2003, the cyclically adjusted P/E ratio on the S&P 500 was around 26. By mid-November of this year, it was approaching 22. These are not the foundations on which sustainable long-term equity returns are built.
A high-quality caveat
What, then, is leading the charge today? Stocks like:
Don't be a knee-jerk jerk
Instead, I'm going to focus more on building out the short side of my portfolio. I find this especially important, because my portfolio is not full of names like J&J and Wal-Mart. I buy small, weird, ugly little stocks. Many of them hail from speculative sectors like oil & gas and mining. These sorts of holdings tend to get killed when the market turns south. I'm already holding a large percentage of cash today, but I'm thinking I need to crank up the d