Proponents of the Efficient Market Hypothesis (EMH) believe it is impossible to “beat the market” because stock market efficiency causes existing share prices to always incorporate and reflect all relevant information. According to the EMH, stocks always trade at their fair value on stock exchanges, making it impossible for investors to either purchase undervalued stocks or sell stocks for inflated prices. So are stocks trading at fair value?
- ZeroHedge – Trump “Hope” Gap Nears 400 S&P Points
Now, let’s look at the an up to date graph of the Shiller PE Ratio – tracking the Valuation Multiple of the S&P 500:
- Multpl – The Shiller PE Ration
Does it look like stocks always trade at their fair value? The only other times we have seen valuation multiples this far above the mean was right before the Wall Street Crash of 1929 and right before the dot-com bubble burst.
Based on this – I have decided I need to Hedge my portfolio, something I almost never contemplate – because it tends to be a waste of money. I will be looking to buy very cheap puts (Volatility is so low) – and perhaps try to fund the puts by selling a credit spread on the S&P 500. Not sure about the second part – not really being paid to take risks right now.
I might also unload my GILD Holdings this week – they are the only thing in my portfolio that is not working, and I want to lighten up my equity holdings at these crazy levels. Besides “Buy low, sell high” – one of the most enduring sayings on Wall Street is “Cut your losses short and let your winners run.”
Will keep you updated – hope to have something fleshed out by the end of the week.
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