U.S. Stock Market - Valuation, Sentiment, & Other Pricing Factors

The folks at Goldman Sachs (GS) produced some exceptional research this past week which probably should be incorporated in any decision to invest in the U.S. stock market now. Specifically, David Kostin and his team at GS produced the following noteworthy valuation chart which shows that for stocks in the S&P 500 Index the median Enterprise Value (EV) to Sales ratio is now at an all-time high.

And here is another example of the superlative research done regularly by veteran market watcher Ed Yardini (www.blog.yardeni.com), President and Chief Investment Stategist at Yardini Research, Inc.

Investor sentiment, which is normally considered a contrary indicator, should also be considered a worrisome variable. The following chart from Investors Intelligence clearly shows a dearth of bears.

China reported a trade deficit of $23 billion in February. I first saw this report late Friday afternoon, March 7th, but I can't be 100% sure this wasn't disseminated earlier in the day. My best appraisal here is that this information was NOT available during the NY trading day on Friday. Why is this important? According to Bloomberg News, the consensus projection from 45 economists was for a $14.5 billion SURPLUS!! Exports actually plunged 18.1% from the same month a year ago. The consensus estimate had called for an INCREASE of 7.5%.

When China sneezes does the rest of the world catch Pneumonia?

As reported several times in this column over the last few months, I have a proprietary computer screen that finds the most overvalued and the most undervalued stocks each week. The latest list of overvalued stocks has 119 names on it. Here are the first 25:

The average stock on this list trades at 167x Forward 12-month earnings estimates (F P/E), 12.19x Sales (P/S), and 15.15x Book Value (P/B). The average stock on this list has a current market capitalization of more than $13.0 billion, but produced negative earnings of $0.10 per share over the Trailing Twelve Months (EPS ttm). At one point in 2014, I believe that most of these stocks will be down as much as 50% or more. Biotech and drug-related companies have been purposely excluded from the above list given the need for special valuation metrics to analyze this particular sector. In the interest of full disclosure, I am NOT short any of the stocks on this list, but I do currently hold a large position in the Pro-Shares Ultra-Short S&P 500 ETF (symbol SDS) in one of my managed accounts.