From Above the Market:
As I have noted before, in economics, leading indicators are measures that typically change before the economy as a whole changes, thus providing some predictive power with respect to what lies ahead. For example, the Conference Board publishes a Leading Economic Index intended to forecast future economic activity.
My intent then was and still is to derive some Leading Investment Indicators. Unlike leading economic indicators, these were not designed as short-term predictors. The strength of these metrics is as a tool to measure potential real, long-term returns. Thus they are better used as longer-term indicators of value, risk, and expected returns. They in no way should be used as any sort of timing mechanism. The stock market can continue higher regardless of what any metric of valuation is showing. These indicators are designed to be a helpful tool to help shape an overall investment thesis and process as well as to separate short-term and long-term concerns, not to dictate trading decisions.
My conclusion then was that the market was not long-term cheap. I think they are worth revisiting as we begin 2013.
1. PE10. The largest contributing factor to equity returns is the P/E ratio. The expansion or contraction of the broad market P/E ratio creates secular bull and bear markets. The chart below...
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