Smithers & Co. Finds That S&P Is Now Over 70% Overpriced Based On CAPE And q

Tyler Durden's picture

When we last looked at the updated CAPE and q S&P valuation readings as compiled quarterly by Smithers & Co, the market was only 48% overvalued. It is therefore not surprising that following one of the most ridiculous melt ups in the past two years (and we have had many in that period) that following the firm's most recent Z1 update of the CAPE (Cyclically Adjusted PE) and Tobin q chart, the S&P is now well over 70% overpriced. This is obviously amateur hour. With the Bernanke Put having eliminated all risk and stock trading lab rats now concerned about being bumped up in a higher tax bracket, not to mention that the S&P 500 20 day historical vol just hit 39 year lows, please wake us up only when this number is in the 4 digit range.

From Smithers & Co.

With the publication of the Flow of Funds data up to 30th September
2010 (on 8th December 2010), we have updated our calculations for q
and CAPE. There has been little change in the underlying value of the
market, but the rise in share prices has meant that non-financials are
74% overpriced according to q and listed shares, including financials,
are 73% overpriced according to CAPE.

The calculations include the data published in Z1 Table B.102 as at
30th September, 2010, while that for CAPE includes the EPS on the
S&P 500 up to the 30th June, 2010. The chart shows year end values,
except for 10th December, 2010. (It should be noted that we use
geometric rather than arithmetic means in our calculations).

Although the overvaluation of the stock market is well short of the
extremes reached at previous year ends in 1929 and 1999, it has reached
the other previous peaks of 1906, 1936 and 1968.

It should also be noted that, once the market become significantly
overpriced, the degree of overvaluation rises rapidly with further
increases in share prices. For example, a 20% rise in share prices,
such as occurred from 30th June to 10th December, means that a market
which was overvalued by 44% at the end of June will be overvalued by
73% today.

Data for our calculations of q are taken for 1900 to 1952 from Measures of Stock Market Value and Returns for the Non-financial Corporate Sector 1900 - 2002
by Stephen Wright, published in the Review of Income and Wealth (2004)
and for 1952 to 2009 from the Flow of Funds Accounts for the United
States (“Z1”) published by the Federal Reserve. Data for our
calculations of CAPE are taken from the data published on Robert
Shiller’s website.

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Phineas Gage's picture

Light volume today is interesting.

Salinger's picture

I am at a location with CNBS being broadcast and was (un)lucky enough to capture this image, which I am sharing with you all - it embodies everything that is wrong with the markets and the system; an image to which I give the title:


Flapjackmaka's picture

heh. Still can't believe my dad watches this tool. He still believes stocks are a good indicator of the economy and all the forclosures and layoffs are "lagging". lol

Deep's picture

So does this mean buy buy buy?


Sudden Debt's picture

The blue and the green line are like waves on the natural applegreen background...




And you know what they say about art! The value of art is as high as the biggest fool wants to spend on it.


plocequ1's picture

I saw this pattern in Psychedelic wallpaper at Utopia while shopping for my Atomic Rooster poster and Lava lamp. Im getting Vertigo looking at this chart as we speak.. Listening to Emerson Lake and Palmers Tarkus intensifies it.

Flapjackmaka's picture

Hey guys. New here. I’ll be in college soon taking economics. Been reading around everywhere learning and decided to ditch business insider because it’s full of bullish crap. What are you guys’ outlook for 2011 in terms of the dow? I think it will go up then down but don’t know how much. And QE might push gas soon above $4. Oh boy.

They're denying this over there. heh

Cursive's picture


Fuck going to college and becoming a debt slave! You want an economics lesson? Watch "The Money Masters" or read "The Creature From Jekyll Island.". Keep reading ZH and avoid banks and debt.

MachoMan's picture

Unless you already have a job secured post graduation, I would strongly suggest vocational school.  Think repairman...

goldmiddelfinger's picture

Per TD monthly counts, NDX, RTY, DAX (and silver by the way) are at exhaustion-sell set ups of +9. SPX and Dow slightly lower (Dow mark is 12009)

erik's picture

Do you follow DeMark yourself or was this posted elsewhere and you're referencing it?

I was wondering where the counts were at these days.


Cognitive Dissonance's picture

Data for our calculations of q are taken for 1900 to 1952...............and for 1952 to 2009...........

Oh I see what the problem is here.

It's different this time around and they're using old data. Get with it dudes. It's 2011 and the next once-in-a-lifetime Generation FED bull market has just started. Party hearty dudes.

Cursive's picture

Just look up BAC for an example. This bank will eventually die (or be subsumed by Uncle Sugar). It has NO earnings, but is up over 6pc on "settlement" news. Thank you, Cramerica!

Bill Lumbergh's picture

Not to worry, Harry will justify these lofty levels for all of us so we can be better informed about valuations.

ATG's picture

Just put in a Trailing Buy Stop above DPK in case of market collapse

(Please fix captchas that ask for three digit answer but do not accept it)

Cognitive Dissonance's picture

That's actually part of the captchas. Those who can't think independently or act outside of an instruction set just give up and don't try to sign on. It keeps some of the riff raff out. :>)

Bill Lumbergh's picture

So this is designed to create an additional layer of security...we answer the mathematical question correctly yet told we are incorrect but should submit the answer again to be correct...I need another sangria.

Missiondweller's picture

So I guess the question is how long can the Fed keep pushing it up?


Go along or hide out in PM's?

chrisd's picture

Perhaps you could just sit in cash and wait for a better entry point.

Missiondweller's picture

That's what I did all 2010. Split between cash and PM. Worked well though.



Phineas Gage's picture

Am I reading this correctly?  S&P is less overvalued when including financials.  That should have a qualification next to it.  If you factor the FASB 157/MTM issue, which has distorted everything, then it is way off.

thepigman's picture

Anything below 6000 on the Dow is

about right for a 2% GDP for the next

10 years. Molasses speed.

thepigman's picture

But the bernank has decided you will

pay UP for no growth, sucker.

thepigman's picture

Biggest con of all time...and by our own


the rookie cynic's picture

US now "all in" on ZIRP economy. If rates rise, debt bomb explodes US economy. If rates stay low, inflation bomb explodes. Synchronize your watches to Mr. Bernanke's.

But hey, I'm probably over-reacting, The Bernank can stop inflation in 15 minutes after all.


Mae Kadoodie's picture

Smithers....release the hounds!!..

HarryWanger's picture

If you think it's that overvalued now, just wait a couple of months when we're pushing past 1350.

thepigman's picture

You gotta be stupid to worship the

beard. The voice quiver says it all.

thepigman's picture

the voice quiver sez bernank himself is afraid of his own big con

Astute Investor's picture

I have already swapped all my assets into a diverse collection of small, discretionary, home decor items.  That's where the REAL value is today!

Chotsky bitches!

gwar5's picture

nice, nobody would even think to look there

taraxias's picture

Not before we go through 1,150 first HarryWanker


i'd say--1122.12 in today's dollars

1110 in then current dollars @ 1/21/11...:)

Bill Lumbergh's picture

Harry I knew you would post on this article and frankly I am disappointed you shoot so low...why not just go for the gusto and forecast a new nominal S&P high of 1,650...China will build a few more vacant cities the size of New York to pump up the world economy.

Lionhead's picture

Harry, you just don't get it do ya? ;)  No manner how folks here try to explain it to ya, ya just don't get it...  So, have a look here at the short video so you know what Dow 50k really means in terms of your profits & what you can expect to keep. Smartin' up Harry, don't be a chump all your life...


USD Long's picture

When I apply the "Geologic" time frame to my charts my portfolio indicates a handsome, (also not to be found in nature), straight line.

spinone's picture

Bullshit, CAPE is at 18, CAPE for a recession is 8-10, CAPE for a Depression is 6-8.  The market is 300% overvalued.

greenewave's picture

Watch the video “Economy Stage 4 Cancer Patient ~ Stocks Rigged” at (

Anonymous –

It’s unbelievable that it has gotten to the stage where we actually know without a shadow of a doubt that the U.S. economy is RIGGED! I can’t wait for the PONZI scheme to continue!!

gwar5's picture

The pump and dump of stocks will mean another "crises" after the crash

It'll be the excuse to confiscate private pensions (401Ks) afterwards

It's been talked about here, and is accelerating in Eurotopialand