No. of Recommendations: 12
One hears a lot of claims that the stock market is too "rich." They never seem to give reasons why. I'm not sure it is a good way to tell whether stocks are "rich," but P/E* is at least one way.

The P/E of the DJIA on January 31st 2013 was 15.29. Actually this number is close to average, and it is certainly no where near 2007s high of 22 (the last time the S&P500 broke through 1,400), though higher than a year ago at 14. The P/E of the S&P500 is a tad high at 18.31 and higher than a year ago at 15.11 but not screamingly so.

Interestingly the DJ Transportation Index has actually fallen from a year ago 18.31 vs 20.94 so it looks like a correction may be going on. The same is true of the Russell 2000 that has dropped to 31.65 vs 44.40 a year ago.

I admit that the DJ Utility Index does appear to be over bought at 22.18 vs 14.33 a year ago, but that is not what the hysterical comments are about.

All in all, I think this stock market has a ways to run though one might be careful of the Russell 2000 and the DJ Transportation indices where corrections seem to be going on, though the yields are improving there. The DJ Utility Index looks overbought and even the yield has droped for some reason. However, our particular holding here of Big D (Dominion Resources) and Duke Energy seem to be performing well.


*See The table does not state whether the numbers are arithmetic mean or geometric mean.

A problem with P/E is that negative P/Es (or losses) are entered just as zero. If a rigorous P/E was used, something like the NASDAQ 100 might be considerably higher.

Still, the P/E for the March low in 2009 of the S&P500 was 116.31, but it was even higher on June 30th at 122.4 (–earnings_ratio). Actually this was a good buying point wasn't it?
Print the post  


What was Your Dumbest Investment?
Share it with us -- and learn from others' stories of flubs.
When Life Gives You Lemons
We all have had hardships and made poor decisions. The important thing is how we respond and grow. Read the story of a Fool who started from nothing, and looks to gain everything.
Community Home
Speak Your Mind, Start Your Blog, Rate Your Stocks

Community Team Fools - who are those TMF's?
Contact Us
Contact Customer Service and other Fool departments here.
Work for Fools?
Winner of the Washingtonian great places to work, and Glassdoor #1 Company to Work For 2015! Have access to all of TMF's online and email products for FREE, and be paid for your contributions to TMF! Click the link and start your Fool career.