an tSionna {PE Levels}

Above you see a chart of the S&P 500 ETF, SPY, devoid of any other indicator except certain Price to Earnings {PE} levels that I've penciled in on its chart.  Note that these are not drawn to scale at the top or bottom and should be used solely as reference points. These are PE's based on a current four quarter rolling estimates of $123.06.  Anything above the Blue line has a 15 PE and anything below it carries a 14.  Back in the day when I was just a whelp of a young broker the Consigliere took pity on me and taught me the basics of the business.  One of the things he always said "is that a market trading with a forward {PE} higher than 16 starts to get expensive and a PE under 14 starts to look cheap".  

That's been a pretty good rule to live by during my career.  Now of course with every rule with investing you have to look at the time and circumstances.  For example maybe right now stocks deserve to trade at a higher multiple given the low rates of return you can earn in other assets such as bonds. You also have to understand that stocks can trade above and below these perimeters for long periods of time.   The market basically traded under a 14 PE until last year from the 2007-2009 decline.  The market is also smarter than you or I so perhaps it's telling us that earnings will be better going forward than most expect right now.  But at any rate you can see where we are today.  Only time will tell what this means and I don't consider this by itself a reason to be nervous.  But you have to know where we are in relation to valuation and this at the very least is something to take note of as we go forward into the summer months.

*Long ETFs related to the S&P 500 in client and personal accounts although these positions can change at any time.

Charts come to us via stockcharts.com.  Earnings estimates come from the excellent blog Fundamentalis.com.