Indicators | Slack Investor

Where to go fishing? – Part 1 – Profitablity and Growth

A Day’s Fishing (circa 1923) – Edward Henry Potthast

The obvious answer is … where there are fish.

Slack Investor is always on the lookout for growth companies … particularly when he is on the BUY! Since retirement, I haven’t had much chance to be on the Buy side of a transaction lately – as there isn’t that flow of fresh new money coming into the coffers from employment. Pre-retirement, any new money would flow into the cash reserves of my Super (SMSF -Self Managed Super Fund). When a sufficient amount of cash had built up, I would look around for some company shares to buy.

However, with the expected inflow of a bit of cash with the impending sale of Altium, I am starting to look around for suitable receivers of Slack Investor loot. Slack Investor is “Going Fishing”. The first thing I want in my pond is profitable companies – but I also want them to have a record of growth. In the second part of this fishing series, I will try to narrow things down to companies that I would actually like to buy.

Measures of Profitability

Slack Investor likes a company, that he invests in, to not only make a profit – but to use its shareholder funds in the best way to make a profit. There are many ways to look at profitability, but Slack Investor is pretty lazy in this regard and you won’t find him forensically gazing over profit and loss statements from a company report. I prefer couple of simple ratios to get an overview – I am no expert accountant.

Return on Equity (ROE)

ROE = Net Income/Shareholder Equity

I have always used Return on Equity (ROE) as a simple measure to give an idea on how a company is growing. Strictly speaking, the ROE is more a measure of profitability and how well it grows each dollar of company funds.

The higher the ROE, the more efficient a company’s management is at generating income and growth from its equity financing.
Investopedia

This metric is very easy to find in market aggregator sites such as Yahoo.com, Morningstar, or Investing.com. For a deep dive, I prefer Marketscreener.com – which has the advantage of showing Predicted ROE for the next few years on each companies financial page. One of the problems with ROE is that, companies with debt can present an inflated ROE.

Return on Invested Capital (ROIC)

ROIC = Net Profit (After Tax)/Average Invested Capital

The purest way of looking at how good a company is in converting shareholders money into profit is the ROIC. Unfortunately, this figure is harder to come by on the generic financial aggregator sites. This ratio is superior to the ROE as it accounts for the debt levels of a company – as the Average Invested Capital is the Average Equity – Average Debt.

Measure of Growth

Compound annual growth rate (CAGR)

A quick way of determining if a company is growing is the CAGR. It is often constructed from past , data. The “Compound Annual Growth Rate”—is the annualized rate of growth in the value of the Earnings, or Revenue, over a stated period. The maths is a bit complicated and best done on a spreadsheet or a search around the financial sites. I found limited CAGR data for stocks at Morningstar and finbox.com

CAGR is defined as the annualized growth rate in the value of a financial metric – such as revenue and EBITDA – or an investment across a specified period.
Wall Street Prep

Putting together Profitability and Growth

Fortunately there are some really nice blokes in the financial world that share the burden of responsibility to educate people about the share market as well as operating a profitable business. A shout out to Owen Raszkiewicz of the RASK Group. A great place to start your financial education with Owen is his Australian Finance podcast that he co-hosts with Kate Campbell. Slack Investor will often tune in to their discussions.

Below is a table Owen prepared in August 2023 that ranks Australian stocks in terms of their profitability (ROIC – Return on Invested Capital – Column F). He also shows, in the last column, the stock’s historical growth rate for the 5 years 2017-2022.

From Rask Media – ASX’s best companies published August 2023 – ranked in order of ROIC- Click on image to enlarge

This is a great place to start fishing, metrics for profitability and growth in one place. Pro Medicus is standing out here – High profitability (ROIC 55.48%) and high historical growth (5-yr CAGR 24.22%). A complete picture needs both of these metrics. For example, Woolworths has a high profitability (ROIC 41.28%) but is laggard in historical growth (5-yr CAGR 2.10%).

The next article in this series will look at how Slack Investor narrows these stocks down and then screens them further with the P/E Ratio to try to make sure that each potential buying stock is not overpriced.

Alphabet … Google It

Sundar Pichai, the CEO of Google and its parent company Alphabet looks ready to play the “evil genius”.

At around 15% of my investments, Alphabet (US:GOOGL) is a major holding in my portfolio. It is my biggest international holding. I first dipped into the stock back in 2019 and have been trying to top up (in small amounts) each year since.

Since Larry Page and Sergey Brin launched Google in 2004 with a killer search engine, the many tentacles of Google/Alphabet have spread into the everyday life of billions. Youtube alone had 2.6 bn annual users in 2022.

(Google’s search and advertising) is Alphabet’s best business, accounting for 80% of Google’s total revenue in 2022 including Google Search and other properties like Google Network ads and YouTube. The remaining 20% comes from Google Cloud (9.4%) and its apps, hardware and content businesses (10.4%).
From Intelligent Investor

Why keep investing in Alphabet?

Before any investment decision, Slack Investor will do a bit of research. Market Screener has a Financial page on each stock.

When the income chart looks like the above showing a track record of growth (prior to 2023) – and projected further growth up to 2025 – I’m interested. A look now at Slack Investors favourite finance indicators. A projected Return on Assets (ROE) of 24.5 in 2025 (well above 15%), a 2025 predicted PE ratio of 17.5 (very low for a growth stock), and plenty of cash on hand for further aquisitions – it all looks good.

Nitpicking

Despite admiring the skill of Alphabet management in aquisition and company growth, Slack Investor is not enamoured with everything this company does. There are some things that I find annoying. Back in 2017, they sudddenly dropped their popular Google Finance Portfolio feature. Slack Investor then migrated to Yahoo Finance to keep track of his portfolio. I note that Google Finance has recently reinstated its porfolio feature – but I have already moved.

To keep growing revenue, many of their channels are being further monetized. I love using Youtube for music, entertainment, and the millions of helpful “how to” guides. However, the ads at the start of the clips are tedious. This is an attempt to get people into Youtube (no ad) Premium at $13.99 per month.

I also had a recent battle to reduce the amount of data in my google account (Photos, Google Drive, gmail) to below the 15 Gb free limit. This is deliberatly not a simple process and seems to be designed to push people into more storage through a subscription starting at $2.49 per month.

These are relatively small quibbles though – and Slack Investor really doesn’t expect “something for nothing”. I continue to hold and a happy buyer of this company using an international e-broking account with CMC Markets – Alphabet, I hope, will be a very long-term holding.

Buying Shares the Slack Way

The last time Slack Investor wrote about how he buys shares was two years ago, and The Slack Buying Process is worth a read for the detail. I must admit that not much has changed in the method that I use. Two of the shares that I bought back then Alphabet (US:GOOGL) and Betashares NASDAQ 100 (ASX:NDQ) have done OK in that time period, but Coles (ASX:COL) has lagged a bit, but because of dividends, is not on the losing pile yet.

	Buying Price AUG 2021 (AUD)	Current Price SEP 2023 (AUD)
US:GOOGL	$195.45	$214.53
ASX:NDQ	$34.09	$36.28
ASX:COL	$17.94	$15.85

Regardless of these preliminary two-year results, nothing fundamentally has changed for these companies and will stick things out for at least a 5-yr period – and then judge performance.

Since retiring, not much buying and selling goes on in my stable pile. For the investing pile, as I am now mostly a fully-invested “Buy and Hold” type of bloke, I don’t get to buy very often. The only opportunities come when I sell something, or my dividends build up beyond my living expenses.

The first thing to do is get a list of companies that you might be interested in. Slack Investor is an avid reader of the financial press. I get heaps of buying ideas from investment sites such as the AFR, Livewire, Morningstar, ShareCafe, InvestSmart, Motley Fool, etc. I pay particular attention when any articles I read mention “growth”.

Unlike when I am buying fish, for buying shares, I really want to look at the “guts” of a company. For this purpose, my best friend is the excellent Market Screener site. I type in the company name and then look at the Financials Tab. This gives me an overview of what the company has done and what analysts project that a company will do. There are lots of things to look at when evaluating a company – Management team, past performance, level of debt, projected sales, etc. However, if I could boil down a company to its essence with just two financial measures, it would be these two discussed below.

Return on Equity (ROE)

The ROE is usually expressed as a percentage and is the Companies

ROE = Stated Net Income/ Shareholder Equity.

For an instant way to look at whether a company is profitable, they will report a positive ROE. It is an indicator of how well the company uses shareholder funds. If I was getting a 5% return on my money in the bank, my ROE for that investment would be 5%. Obviously a high ROE is good. Slack investor likes his investments to have an ROE of at least 15%.

Sadly, the ROE can sometimes be manipulated by the management team by using a number of tricks. They might use accounting loopholes to distort earnings, or hiding assets off the balance sheet – both of these tricks will inflate the ROE.

As the denominator of the ROE equation is just shareholder equity, it ignores the effect of borrowings. Companies can boost their ROE by taking on large loans (risk). Also, a company with a large cash reserve (desirable for potential take-overs and share buy backs) will be penalised in the ROE calculation.

By screening out companies with large debt and including only companies with a track record of good management,- you can try to mitigate these risks in ROE calculation. Slack Investor is always looking forward, and he likes to use the Projected ROE of Future Income/Shareholder Equity.

Price/Earnings Ratio (PE)

The PE Ratio is defined as a companies share price to its earnings per share.

PE Ratio = Current Share Price/ Current Earnings per Share.

Slack Investor is usually looking at “growth” companies with a relatively high PE Ratio. A high PE ratio could either mean that a company’s stock is overvalued, or that there is an expectation that there might be high growth rates in the future.

By itself, the PE Ratio can be misleading. Sometimes, the earnings of a company can be manipulated through accounting measures and, there is a flaw in this ratio as it does not account for the assets and liabilities of a company.

A PE ratio is best used when compared against similar companies in the same industry or, for a single company across a period of time. Slack Investor usually gets the jitters when the projected PE Ratio is over the 40-50 mark.

Putting it all together

	PE 2026	ROE % 2026
ASX	20	14
CPU	16	33
TNE	38	34
XRO	62	20
SEK	25	11
COH	38	23
RMD	18	22

I put all my possible “growth” stock buying options into a table and used Market screener Financials to get the projected (future) values for PE Ratio and ROE for 2026. I rejected XRO as it was too expensive (PE Ratio greater than 40) and ASX and SEK for low ROE ( <15%). TNE is a great company with good ROE and no debt, but slightly expensive (ROE 38). COH was also slightly expensive (ROE 38).

This left me with CPU (Computershare) and RMD (Resmed). Both good companies with good prospects. Lets have a look at the charts.

For now, Resmed (RMD) seems to be on a downward trend – and Computershare (CPU) on the up. The trend is your friend. This is not advice, but I bought some Computershare on the basis of the above analysis – slightly worried about the debt levels of CPU (which would tend to inflate the ROE), but I bought a small amount and will give this investment 5 years – then re-evaluate.

Alignment

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

We have 8 planets in our solar system (sorry Pluto!) all whizzing around the sun at different rates, occasionally they “align” when the planets line up or appear close together in a small part of the sky .

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.
Australian Geographic

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 value and 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.

Alignment of Value and Momentum Together

Slack Investor will again rant about how market timing is difficult and that the best time to buy stocks is “all the time” – by automating your investments so that their is no decision inertia. Use dollar cost averaging.

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!

Nuns Know Best

In Nuns … Wisdom – The New Indian Express

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.”
Edwin “Sedge” Coppock – from Business Insider

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.

Slack Investor is a great believer that market timing is difficult and that the best time to buy stocks is “all the time” – by automating your investments so that their is no decision inertia. Use dollar cost averaging.

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”.

Nuns are not infallible … but mostly wise.

The Hubris Ark

Cathie Wood CEO of Ark Invest – from Observer

hubris: (noun) – an extreme and unreasonable feeling of pride and confidence in yourself:
Cambridge Academic Content Dictionary

Cathie Wood is the CEO of Ark Innovation and is best known for her NASDAQ based flagship fund ETF (ARKK). She has been concentrating her bets on the “disruptive technologies,” such as artificial intelligence, genomics, blockchain and cryptocurrency, and clean energy. She is a big fan of Tesla and has made the prediction

Bitcoin will crack $1 million by 2030
Cathie Wood – The Street

Slack Investor is no seer … but at the October 14, 2022 price of 16240 USD, Bitcoin has quite a way to go to reach that mark. In the words of the great BBC TV character Sir Humphrey, this looks like a “very courageous” prediction Cathie!

The ARK Innovation ETF (Nasdaq: ARKK)

Wood, is a devout Christian, and has named her company after the sacred Ark of the Covenent. Cathie Wood is a household name in the US and has a huge number of loyal fans. Her funds had 60 billion USD under management at their peak. She was named by Bloomberg as Stock Picker of the Year in 2020 . The flagship ARKK fund gained a remarkable 152% in 2020, but since then, the performance has not been so stellar – ARKK is down 65% so far this year. In interviews, she often refers to her past success, and insists, over and over again, her performance should be judged over a five-year time horizon.

The Price chart of the ARKK ETF since 2017 –

Wood is nothing but confident. She hosts a monthly finance video – delightfully called “In the Know” and is a great defender of her fund. She sees “spectacular returns” for Ark Invest over the next five years. According to a recent article by New York magazine, her initial predictions for ARK Invest were annualized returns of 15 percent, “Now we think 50 percent.”

Slack Investor would agree that a 5-yr holding period is a good minimum to judge how a fund is performing – to allow for volatility and to allow growth stocks to grow. She might be right that tech stocks are undervalued at the moment. But let’s have a look at her results as a fund manager over the last 5 years. The total return of ARKK expressed as a compound annual growth rate (CAGR) since November 2017 was a not so impressive 3.5% when compared with other “no stock picking” index funds.

Instrument	Value Nov 2017	Value Nov 2022	5-yr CAGR
ARKK	36.44	43.31	3.5%
NASDAQ 100 TR	7159	13881	14.2%
S&P 500 TR	5212	8407	10.0%
FTSE 100 TR	6510	7564	3.1%
ASX 200 TR	56486	81102	7.5%

Based upon the 5 years preceding November 2022, the compound annual growth rate (CAGR) of various Total Return (TR) index values compared with the ARKK ETF (including dividends since Nov 2017 of $2.91 USD). These TR calculations include dividends. Data from Yahoo Finance and CAGR calculations from CAGRCalulator

Cathie Wood conducted a recent session at a Morgan Stanley event in Sydney. where she maintained her bullish outlook. According to the Financial Review, the fund manager essentially argued it’s the market that’s got it wrong, not her!

Slack Investor is far more humble … he “takes his licks” when times are bad – doesn’t “crow” when times are good – and is mostly wary when a new “stock guru” emerges.

In the stock market, volatility is the price he has to pay for being involved with long-term asset growth.

November 2022 – Mid-Month Update

This image has an empty alt attribute; its file name is trend-1445464__180.jpg

My small-scale, and often very frustrating, market timing experiment continues until its projected end in 2024. On a weekly signal for the FTSE 100 from the momentum following Directional Movement system. I have bought back into the UK index. I am back now to fully invested in the ASX Index, UK Index, US Index.

The buy signal can show itself as a downward dip in the trend strength indicator ADX (grey line) of the lower panel below. There are many ways of setting up this Directional Movement 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.

FTSE 100 Weekly chart showing a BUY signal on the Directional movement Index *weekly chart. The weekly price ranges are at the top and Average Directional Movement Index (ADX) patterns below – From* Incredible Charts

The Index page has been updated for the UK Index .

Are CAPEs back in fashion? … and September 2021 – End of Month Update

Superhero Capes That Had A Purpose Vs Those That Didn’t — Photo:© Marvel Studios

Slack Investor is often “banging on” about Price to Earnings (PE) ratios. The economist Robert Shiller designed the even sexier 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. The details on how to calculate the Shiller CAPE Ratio can be extracted from Seeking Alpha.

Relationship of annual market returns (over 10-yr period) to current CAPE. From Research Affiliates – based upon Shiller Data

Professors Shiller and Campbell found that, the higher the CAPE, the lower the likely annual return from equities over the following 5-20 years. The current US CAPE is at one of its highest levels since the 1880’s. GuruFocus provide current information on the S&P 500 CAPE and market return predictions based on Shiller’s work.

What originally started me thinking of CAPE is this excellent visualization prepared by John Kingham of Seeking Alpha for the UK FTSE 100. This chart shows how the current FTSE rates with fair value at a glance. John uses a “Fair Value” UK CAPE of 16 -just a bit below its recent average of 17.5. The UK CAPE black line seems still in “fair value” territory – according to Shiller, this is generally OK for a buyer in terms of long-term returns.

This chart of the UK FTSE 100 CAPE from Seeking Alpha. The FTSE CAPE is the black line and John Kingham has prepared the CAPE zones to indicate GREEN = cheap, YELLOW = fair value, RED = expensive (75% above the mean) – Click for higher resolution

There have been a few criticisms of the use of CAPE as a predictor, as it has consistently underforecast returns for the past 25 years. Since the original research, new accountancy rules have brought significant changes to the way that company earnings are calculated. There are also arguments that CAPE values are structurally much higher now as the result of cheap money from the 40-yr decline in bond yields.

Graph B1: 10-year Government Bond Yields — Cheap money has changed things – From the Reserve Bank Australia

We are also in times of high government stimulus and, with interest rates so low, there is more than the usual amount of money in the share market. It is a case of no other alternative – perhaps, with the exception of residential property.

Slack Investor has no idea whether the extremely high US S&P 500 CAPE values may continue for a while … It is a complicated market at the moment. With the US Market at 38 times the 10-year average earnings … the US Market Is Not Cheap and, I am glad that my stop losses for index funds are set tightly within 10% of recent highs in the share price.

The rich data on CAPE ratios for a range of countries is prepared lovingly by Barclays each month. The CAPE values of the US S&P 500 CAPE, ASX 200 CAPE and the FTSE CAPE are respectively, 61%, 19% and 0% above their 39-yr averages. Interestingly, the US market CAPE (24.5) has a far higher mean than Australia (20.4) or the UK (17.5). This may be due to higher earnings growth prospects in the US.

Historic CAPE Ratios for the S&P 500, ASX 200 and FTSE 100 together with their 39-year averages – Developed with data from Barclays

Is CAPE a good predictor of a market correction/crash

In the below chart I mapped the US S&P 500 against the S&P 500 CAPE to see if the CAPE is useful for determining market turning points.

The CAPE indicator does not seem to be a good predictor of short-term share market prices – as high CAPE values have been at sustained high levels for many years. CAPE trends seem to immediately mirror the trends in the share price. However, Professor Shiller’s established relationship with high CAPEs and lower forward returns in the longer term is hard to ignore. Interest rates will not stay low forever. Regardless of the unusual circumstances of todays stock market, the US market at 61% above its 39-yr average, looks expensive.

September 2021 – End of Month Update

Slack Investor remains IN for Australian index shares (ASX 200), the US Index (S&P 500) and the UK Index (FTSE 100).

After 11 months in a row of monthly stock rises for the ASX 200, things are starting to get a little jittery in the stock markets. This is just normal behaviour. Decent monthly falls for the ASX 200 (-2.7%) and S&P 500 (-4.8%), the FTSE 100 flat at -0.2%.

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 recalculated.