Stock Market is 50% Over Valued, Bear Market is Not Over!

Sharon A. Daniels writes: The stock market has managed to claw its way higher since early March, despite some of the worst headlines since this financial crisis began.
Suddenly, “green shoots” are springing up everywhere, but they can just as easily turn into wilting weeds again this summer, as I’ll show you in just a moment.
The market rally, over the past nine straight weeks, has left many investors frustrated and bewildered. Our message of caution: In the end, you may be pleased that you remained on the sidelines and didn’t jump into what we view as just another bear market bounce.

While this was unfolding, our investment professionals at Weiss Capital Management† were scratching our heads, wondering what on earth investors were thinking. While it’s true that SOME recent data on the economy has improved slightly (by PLUNGING less than expected) the reality is that it’s still a pretty bleak picture … at best! Let’s take a look at the cold, hard facts … and these are just a few of the sobering headlines that have come to light while stocks rallied:
Fact #1 10 Major U.S. Banks FLUNK Stress Test:
Fact #2 U.S. Economy Shrinks Most in FIVE Decades:
Fact #3 One-in-Five Homeowners UNDERWATER:

Long-Term Trend Says S&P STILL 50 Percent Overpriced
Let’s take a closer look at stock market valuation using the price-to-earnings ratio (P/E) …

Back in October and November, as the market plunge was unfolding, the S&P 500 Index looked relatively cheap based on projected earnings over the next 12 months. At that time, the market’s “forward” P/E ratio fell to just 11 — well below the average P/E of 15 over the past 25 years.11 What you must understand is that stock prices collapsed first, but earnings had not yet adjusted downward to reflect worsening economic conditions.So, when corporate profits then plunged, the “E” in the P/E ratio collapsed. Stocks, of course, tumbled further. But even now, after this latest rally, the market’s forward P/E has bounced back up to about 14.5. That’s just about average, but certainly not cheap.12

Another approach is to measure valuations over a longer period, this helps smooth out the ups and downs of the business cycle.Yale professor Robert Shiller looks at a 10-year trend in “normalized” earnings for the S&P 500 Index, after adjusting for inflation. In March, his normalized P/E ratio fell to 13, its lowest level since 1986!13 But wait, that still isn’t dirt-cheap.That’s because, at the end of previous secular bear markets in the 1940s, 1970s, and early 1980s (see graph below) the normalized P/E ratio frequently fell below 10 … sometimes even lower.