Buffett’s Favorite Indicator Read Wrong……………Again

• Posted by ToddSullivan
• on October 8th, 2009

This again….. This was address before when this indicator was being used to declare “now was the time to buy” in Forbes in Feb 2009. At the time I said they erred in their interpretations of the indicator. Then it stood at 75, today 77. People are using this today to claim the market is cheap. They are wrong

I am not saying there are not bargains out there, far from it. What I am saying is that the 77 reading on this indicator is middle of the road. It means the market is essentially accurately priced based on the current state of affairs. If Q3 earnings come in as expected (earnings increases), we will hold or rise some. If they fall short, my guess is we fall fast. Those two scenarios do not lend themselves to a “undervalued” market.

Now, when the index it 57 in March/April, the market was indeed undervalued and the 50% plus surge from those lows is proof of that. Reading above the 70 level are simply middle of the road. It tell us that there will be bargains out there (that is true) but it DOES NOT imply the market in general is under-priced by any means.

There is a reason that during the 1970′s, when this reading was in the 40′s Buffett said at the time he felt like “a guy in a whorehouse with a suitcase full of cash”. It can’t be so with a reading 75% higher that that, right? The market was obscenely cheap. It is not so now.

Please do not fall for this…..

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