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The Rubber Band of the Market is Stretched Too Far

By John Del Vecchio and Brad Lamensdorf

This week’s Chart of the Week dovetails with our analysis of Warren Buffet’s favorite indicator and shows that market valuations are in the nosebleed section.

The chart below is courtesy of Advisor Perspectives and Crestmont. As the chart shows, the price / earnings ratio is over three standard deviations from its mean.

You don’t have to be a math whiz to know that three standard deviations away from anything, is not normal. 

It is a rarity. 

This chart goes back to the 1800’s. We are in rarified air here. 

Truth is, we are far from normal times. 

The Rubber Band of the Market is Stretched Too Far
The Rubber Band of the Market is Stretched Too Far

Just look how far we have come from the financial crisis a little more than a decade ago. The froth from the late 1990’s Internet Bubble was worked off, and the P/E swung hard the other way. This set up a big buy opportunity. 

Those days are long past.

The Active Alts SentimenTrader Long / Short strategy uses numerous indicators, in multiple timeframes, to identify market extremes and adjust exposure accordingly for superior risk-adjusted returns. To learn more, visit activealts.com

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Brad Lamensdorf

Brad Lamensdorf, the founder and portfolio manager of Active Alts, is a principal and co-manager of the AdvisorShares Ranger Equity Bear ETF. He previously managed a long-short investment partnership from 1998-2005 under the name Tarpon Capital Management. Earlier in his career Mr. Lamensdorf was an equity trader/market strategist for the Bass Brothers’ trading arm. He managed a short only portfolio in addition to co-managing a $1bil hedging program. He also served as in-house market strategist for the entire internal and external network of Bass Brothers money managers.

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