- The Cyclically Adjusted Price to Earnings Ratio (CAPE ratio) is at 30.2, a very high level which signals overvaluation of stocks and low forward returns, according to Shiller.
- This level was only exceeded twice in the last 136 years, from Aug-1929 to Sep-1929 and from Jun-1997 to Jan-2002, with market declines of 77% and 45% then recorded.
- The Moving Average CAPE Ratio Methodology used here references stock market valuation to a 35-year moving average of the Shiller CAPE ratio instead of the 1881-2017 long-term average.
- Based on the 35-year moving average methodology, historic market performance points towards continuing up-market conditions, possibly for a number of years.
- To avoid the bear market, exit stocks when the spread between the 5-month and 25-month moving averages of S&P-real becomes negative and simultaneously the CAPE-Cycle-ID score is 0 or -2.
Shiller warns in his recent commentary The Coming Bear Market? :
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- This system holds three ETFs according to stock market climate.
- Typically, during good-equity markets it holds equity- and leveraged-equity ETFs SPY, SSO, and UPRO.
- During bad-equity markets it holds leveraged short equity, short equity, and gold-ETFs SDS, SH, and GLD.
- It never holds fixed income ETFs, so we don’t have to worry about rising rates.
The model was backtested on the on-line simulation platform Portfolio 123 which also provides extended price data for ETFs prior to their inception dates calculated from their proxies. Trading costs, including slippage, were assumed as 0.1% of the trade amounts using closing prices.
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