A few times a year, Slack Investor likes to take a snapshot of the markets using the Cyclically Adjusted Price to Earnings ratios (CAPE) which use ten-year average inflation-adjusted earnings. I first started using CAPE as a “value” tool in September 2021 and, my most recent look was in mid-November 2023. I have decided to do this CAPE market value analysis every 3 months – as I like to keep a feel of where we are – as the market cycles. The next update will be in mid-May 2024.
By plotting this CAPE over a period of time, we can look at how the whole sharemarket is currently valued in terms of historical data – this way we can track the whole share market as it oscillates between overvalued and undervalued.
Using monthly CAPE data from Barclays, the 40-yr mean is calculated and plotted together with the CAPE values. A “fair value” zone is created in green where the CAPE is within one standard deviation of the mean (average).
ASX 200 Value
Historic CAPE ratios for the ASX 200 – From 1982 to end of January 2024 – Click the chart for better resolution.
FTSE 100 Value
Historic CAPE ratios for the FTSE 100 – From 1982 to end of January 2024– Click the chart for better resolution.
S&P 500 Value
Historic CAPE ratios for the S&P 500 – From 1982 to end of January 2024 – Click the chart for better resolution.
At the end of January 2023, the FTSE 100 (11% below the 40-yr average) is the only followed market “ON SALE”. I love a price reduction!
The ASX 100 (4% above the 40-yr average) is in the “Fair Value” zone. However, the S&P 500 still looks well overvalued at 32% above the 40-yr average – and has just moved above the “Fair Value” zone.
A few times a year, Slack Investor likes to take a snapshot of the markets using the Cyclically Adjusted Price to Earnings ratios (CAPE) which use ten-year average inflation-adjusted earnings. I first started using CAPE as a “value” tool in September 2021, and my most recent look was in May 2023.
By plotting this CAPE over a period of time, we can look at how the whole sharemarket is currently valued in terms of historical data – this way we can track the whole share market as it oscillates between overvalued and undervalued.
Using monthly CAPE data from Barclays, the 40-yr mean is calculated and plotted together with the CAPE values. A “fair value” zone is created in green where the CAPE is within one standard deviation of the mean (average).
ASX 200 Value
Historic CAPE ratios for the ASX 200 – From 1982 to end of October 2023– Click the chart for better resolution.
FTSE 100 Value
Historic CAPE ratios for the FTSE 100 – From 1982 to end of October 2023– Click the chart for better resolution.
S&P 500 Value
Historic CAPE ratios for the S&P 500 – From 1982 to end of October 2023– Click the chart for better resolution.
At the end of October 2023, both the ASX 100 (8% below the 40-yr average) and the FTSE 100 (15% below the 40-yr average) are “ON SALE”. If I have a choice, I will always look to buy in the sale period.
The S&P 500 still looks a little overvalued at 16% above the 40-yr average – but at least it has slipped back into the “Fair Value” zone.
Four of the planets that are visible to the naked eye – Saturn, Mars, Venus and Jupiter were aligned on April 24, 2022 at 4.40am visible from Southbank, Melbourne – SBS Australia
Planetary Alignment is a special thing, depending on which planets are involved – and their order. Sadly, Slack Investor wasn’t paying attention when 4 of the 5 planets visible to the naked eye (Mercury, Venus, Mars, Jupiter and Saturn) appeared in a line around the world on April 24 2022.
The bright string of lights in the morning sky (in April 2022) is thought to be a one-in-1000-year event.
Slack Investor is coming to the planetary alignment party very late and is now setting his sights on September 8, 2040, when five naked-eye planets (Mercury, Venus, Mars, Jupiter, and Saturn) will be within a circle of 9 degrees in the sky.
Investing alignment
Slack Investor may be a poor astronomer but one of his skills is noticing when two of the most important attributes in the stock market have an alignment – Value and Momentum.
Value investing involves looking at stocks that appear to be trading for less than what they are worth using a value screener like “book value” or the Price/Earnings ratio. Slack Investor likes to use the Cyclic Adjusted Price Earnings Ratio (CAPE) as a broad indicator of value – the lower the CAPE, the better the value.
Momentum investing just uses charts and indicators to pick out the current movement of a stock. Based upon the theory that – If the trend is upwards … it is likely to continue upwards. This is tricky though … the trend is your friend … until it isn’t!
Because trend trading is difficult, I always like a bit of assurance or alignment with value. Ideally, I like valueand momentum in a stock before parting with Slack cash.
Value
It has been 6 months since I produced a set of index value charts based upon CAPE to look at how the markets are travelling.
As with individual companies, the whole share market will oscillate between overvalued and undervalued. Slack Investor has written about the Cyclically Adjusted Price to Earnings ratios (CAPE) which use ten-year average inflation-adjusted earnings. By plotting this CAPE over a period of time, we can look at how the whole sharemarket is currently valued in terms of historical data.
Using monthly CAPE data from Barclays, the 40-yr mean is calculated and plotted together with the CAPE values. A “fair value” zone is created in green where the CAPE is within one standard deviation of the mean.
Historic CAPE ratios for the ASX 200 – From 1982 to April 2023– Click the chart for better resolution. Historic CAPE ratios for the FTSE 100 – From 1982 to April 2023– Click the chart for better resolution.Historic CAPE ratios for the S&P 500– From 1982 to April 2023 – Click the chart for better resolution.
From the above, The ASX 200 is right on fair value (1% above av.) and the FTSE 100 is cheap (5% below av.). Both are worth looking at for the moment as their CAPE values are at, or below their long-term averages. The S&P500, is still in the “Fair value” range, but at 20% above the long term average – so, no bargain here.
Momentum
There are lots of stock indicators that track momentum. Slack Investor has blogged about The Coppock Indicator before. It has had an incredible track record in signalling the end of a “bear market”. The signal (Green Arrow) is triggered when the indicator (shown in the lower screens below as a white line) bottoms from under the zero line and then slopes upwards.
Monthly charts of the ASX 200, FTSE100 and S&P500 together with the Coppock Indicator (White Line) in the lower section of each chart. The green arrows show the “bottom of the market” predictions using the Coppock Indicator. The red arrows show a possible time to sell – Click the chart for better resolution – Incrediblecharts.com
The ASX 200 (Since 31 Jan 2023) and the S&P 500 (Since 31 Mar 2023) are showing signs of recovery from the bear market with the is well into the Coppock recovery cycle. The FTSE 100 is also showing signs of recovery, but as the Coppock indicator did not get below the zero line, this is not a proper Coppock reversal.
However, the Coppock Indicator has been reliable so far in predicting stock gains. This is not advice, but the ASX 200 currently has the alignment of both value and momentum indicators. Alignment is good … If I wasn’t already fully invested, I would have a crack!
“The sole difference between myself and a madman … is the fact that I am not mad!”
Salvador Dali
Persistence : (Noun) the act of persisting or persevering; continuing or repeating behaviour – vocabulary.com
Persistency is a great investing quality that impresses Slack Investor – but I acknowledge the difficulty. Standard & Poor’s collect data from the US market on how consistently recent top performing share funds are able to keep producing winning records in subsequent years. The following graphic tracks the funds that were in the top 25% of performers in 2018 – and who stayed in the top quartile in successive years.
The percentage of US funds that remain in the top 25% of funds after a 1, 2, 3 and 4 year period – S&P Research – Not many! – Ifa.com
Over a five-year horizon “it was statistically near impossible to find consistent outperformance.”
Just because a fund, or portfolio, did well in one year does not mean it will continue to perform well the next year. Slack Investor has found this himself with his best performing stocks often becoming the worst performing in the next year – such is the nature of stocks. The stock market often moves between being overvalued and undervalued – and it is the same for individual companies.
Most active (stock picking) funds do not exceed their long-term benchmarks
Not only do active managed funds struggle to maintain consistency, most of them underperform index funds. We are lucky that there are a group of economic boffins that keep an eye on things in the funds department. They are the known as SPIVA (S&P Indices Versus Active). Since 2002, they have been collecting world financial data and comparing actively managed funds to passive (Index) Funds. The 2022 data is now in and the disappointing theme continues. For Australian Equity (Share) funds, for the 5 and 10-yr horizons, respectively, 81.2% and 78.2% of funds underperformed the S&P/ASX 200.
The percentage of underperforming Australian funds in various categories over a 1-yr, 3-yr, 5-yr, 10-yr and 15-yr period – SPIVA 2022 Report
How to cope with inflation
To keep pace with inflation you must be invested somewhere – so that your investments can grow faster than inflation (cpi) over time (at least 5 years). I will explain in a future article why I prefer shares and ETF’s as the vehicle to do this over other appreciating assets. So, on this path, to be exposed to equities (or stocks) you can either buy
Active managed funds – Roll the dice here as most of these underperform Index funds after fees, but the minority showed some skill over benchmarks over a 5-yr period – but there is no guarantee that they will keep ahead of their benchmarks.
Low-Cost Index Exchange Traded Funds (ETF’s) – this is the easiest path, and Stockspot have made the process even simpler by researching the best Index ETF’s in each class.
Exchange Traded Index Funds (ETF’s) for a Portfolio
Stockspot diligently analysed 640 of the largest managed funds available in Australia.
Australian Shares Index ETF
For Australian share exposure, Stockspot recommends the ETF ASX:VAS – as it has outperformed 74.3% of large cap Australian shares managed funds over 5 years with an Indirect Cost Ratio (Management Fee) of 0.1% and an annual return (over 5 years) 0f 9.0%.
Here, Stockspot recommends the ETF ASX: VSO– as it has outperformed 63.5% of small cap Australian shares managed fundsover 5 years with an Indirect Cost Ratio (Management Fee) of 0.3% and an annual return (over 5 years) 0f 11.7%
For a swing at the world markets, Stockspot recommends the ETF ASX: IOO – as it has outperformed 97.5% of the large cap global managed funds, available in Australia, over 5 years with an Indirect Cost Ratio (Management Fee) of 0.4% and an annual return (over 5 years) 0f 14.2%.
After a sparkling January, the calendar year has crawled along in share market gains. But, it’s “dividend season” now – and this cheers Slack Investor up greatly.
Declines this month for the Australian and UK markets (ASX 200 – 1.1%, FTSE 100 -3.1%). Those irrepressible optimists in the US keep powering on, with the S&P 500 up 3.5% – even though this is the most overvalued of Slack-followed markets.
Slack Investor remains IN for the FTSE 100, the ASX 200, and the US Index S&P 500.
All Index pages and charts have been updated to reflect the monthly changes – (ASX Index, UK Index, US Index). The quarterly updates to the Slack Portfolio have also been completed
Slack Investor loves a good story – whether its true or not! I like the owning of stocks and I also admire anyone who can stick to their vows. All of this seems to intersect with the story of the Coppock Curve – a technical indicator that can be mapped on stock price charts that has a great track record for showing when the market has reached the “bottom” of a cycle.
When I first started to think a bit more seriously about financial things, I was going to an evening investment class in Townsville. The class was held by a personal Slack Investor Hero, Robbie Fuller, who put on these classes for no personal gain … he just wanted to educate people about the opportunities that lay waiting in the stock market. Robbie would teach us about fundamental analysis (trying to measure the intrinsic value of a stock) and technical analysis (charts and trends). There was always a particular beauty when fundamental and technical information aligned about a company.
The class was usually a lot of fun, but I remember a time around 2011 when the markets were going through a bit of a lacklustre period and we had all had a few recent losing trades – there was just not much excitement about stocks.
Robbie came bounding in one evening after 31 July 2012 with the news that the Coppock Indicator had just turned … it was a sign that “good things will happen”- He was right – It was the start of a 3-yr period where the Australian market was mostly rising. It is much easier to trade when the “tide is coming in”.
The Coppock Curve is a “smoothed” momentum indicator developed by the economist Edwin “Sedge” Coppock and published in in a 1962 issue of Barron’s. It all started when he was commissioned by the Episcopal Church to find long-term investment opportunities for the Church fund.
According to the legend, he asked a group of nuns (or bishops!) how long it took the bereaved to “recover” from their grief. The answer was 11 to 14 months. He took the radical step of thinking that something similar might happen in stock markets after a market high and subsequent downtrend. He assumed that because markets are motivated by emotion, they might be ready to “move on” after a period of 11-14 months of “grief”.
“Crowds do too much too soon”, he wrote. “They overdo. When they get an urge to speculate, their concerted demand forces prices up at a rate far greater than the growth of the company into which they are buying. Likewise, when they liquidate holdings or make short sales during a panicky decline, they ignore basic economic facts. They overdo because they are motivated by emotion rather than reason.”
The Coppock Indicator has had an incredible track record in signalling the end of a “bear market”. The signal (Green Arrow) is triggered when the indicator (shown in the lower screen below) bottoms from under the zero line and then slopes upwards.
Monthly chart of the ASX 200 together with the Coppock Indicator below. The green arrows show the “bottom of the market” predictions using the Coppock Indicator. The red arrows show a possible time to sell – Click the chart for better resolution – Incrediblecharts.com
The indicator gives buy signals very rarely, only 6 times in the past 30 years for the ASX 200. But it has just given another one, signalling a buy for the ASX 200. The maths of the curve is a little complex, but it looks for the next uptrend after the market establishes a high and then goes through a 11-14-month “greiving” period.
Is Coppock’s Bollocks?
There is no perfect trading indicator. Coppock designed his indicator to try to establish a “bottom of the market” buy signal to identify long term investment opportunities. He didn’t try to use it as a selling tool. However, there is a trading strategy that uses this indicator after a BUY signal.
SELL when the Coppock Curve takes its first downwards trajectory OR,
SELL when the Coppock Curve falls below zero
I have trialled both methods and the strongest gain (p.a) results were with the first method. I have marked these sell signals on the chart above with red arrows and tabulated the gain results below.
COPPOCK CYCLE
BUY DATE
ASX200
SELL DATE
ASX200
GAIN
PERIOD(yr)
GAIN (p.a.)
1
31-May-95
1981
28-Jan-96
2171
10%
0.66
14.5%
2
30-May-03
3010
29-Apr-05
3983
32%
1.91
16.9%
3
29-May-09
3817
30-Jun-10
4493
18%
1.09
16.3%
4
31-Jul-12
4269
28-Jun-13
4802
12%
0.91
13.7%
5
31-May-16
5378
30-Jun-17
5721
6%
1.08
5.9%
6
30-Nov-20
6517
29-Oct-21
7323
12%
0.91
13.5%
31-Jan-23
7400?
?
?
?
?
?
Slack Investor uses Incredible Charts to do all his charting … but their indicator screen can get complicated. To easily follow the Coppock Indicator on any stock, just use the free, but great, StockCharts and put in the same chart attributes below.
ASX 200 Chart from StockCharts – showing stock price on top and the Coppock Curve below.
However, looking at the chart history of this indicator … and the GAIN results in the above table, this is not advice, but now looks like a good time to get into the Australian market. Although, officially, the Coppock results are based on the end of month data. In addition, using Slack Investor’s CAPE valuation method, at the end of December 2022 the ASX 200 was “fairly valued”.
In amongst the general carnage of the market, Slack Investor has been doing a little buying. An opportunity came up with an existing holding. Dicker Data (DDR). DDR is an Australian-based technology hardware, software and cloud distributor.
From time to time, a company will go to institutions and shareholders to raise a bit of working capital using a Share Purchase Plan (SPP). Dicker Data (DDR) needed to expand its warehouse facilities. Fair enough – but does Slack Investor want to part with more cash to invest in this company? Lets take a fresh look using the excellent Market Screener Financials Page. The Slack “basics” of a high return on equity (38.7% in 2022) and projected growth – on top of an established period of growth – are still intact – Tick
DDR – Historical (Black)and analyst projected income growth (grey) till 2024 – Market Screener
The price of DDR has been generally “beaten up” in the last 6 months as interest rates have risen and growth stocks have suffered. There are probably some more tough times ahead … but Slack Investor likes to take the “long view”. This business has a long term growth strategy and will probably persevere despite current headwinds – Tick.
DDR – Analyst projected PE ratio till 2024 – Market Screener
The current DDR Price/Earnings ratio is 22.9 – below recent values and projected to reduce further as income increases. – Tick.
Although analyst predictions can be wrong, on balance, the miserly Slack Investor was happy to part with a few dollars in this Share Purchase Plan as he could find some value in this business. There is every prospect that the DDR share price will increase in the next few years.
Finding Index value using CAPE
As with individual companies, the whole share market will oscillate betwee overvalued and undervalued. Slack Investor has written about the Cyclically Adjusted Price to Earnings ratios (CAPE) which use ten-year average inflation-adjusted earnings to take out some of some of the volatility of annual earnings. By plotting this CAPE over a period of time, we can look at how the whole sharemarket is currently valued in terms of historical data.
Using monthly CAPE data from Barclays, the 40-yr mean is calculated and plotted together with the CAPE values. A “fair value” zone is created in green where the CAPE is within one standard deviation of the mean.
Historic CAPE ratios for ASX 200 – From 1982 to September 2022Historic CAPE ratios for FTSE 100 – From 1982 to September 2022Historic CAPE ratios for S&P 500 – From 1982 to September 2022
From the above, The ASX 200 (7% below av.) and the FTSE 100 (13% below av.) are “On Special” at the moment as their CAPE values are below their long-term averages. Even the S&P500, after a long 2-yr period of being “Over valued”, is now getting close to being “Fair valued”.
October 2022 – End of Month Update
Slack Investor remains IN for Australian index shares though it is still on watch after breaching its stop loss at the end of September 2022.
My last post described how I had left the UK and US Index in the middle of October 2022. I am now back IN to the US Index – and, for the moment, OUT of the UK Index. Although, I am keeping a weekly watch on the FTSE 100 in case there is a signal to return to the market.
This month illustrates why I feel glad that my 20-yr index timing experiment is coming to an end in 2024. After exiting the US and UK markets only 2 weeks ago, there has been a rally in both the US Index S&P 500 and (to a lesser extent) the FTSE 100. The momentum has been sufficient for Slack Investor to be “whip-sawed” back into the US Index on a weekly buy signal – I am starting to get “really over” this timing the market experiment.
For the experiment, Slack Investor uses a trend following (or momentum) system called the Directional Movement Index. The buy signal shows itself as a downward dip in the ADX (grey line) of the lower panel below. There are many ways of setting up this system. Slack Investor likes the “smoothing” that is enabled by a system that looks back over the previous 11 periods – but the complexities are best left for the Resources page.
