Shorting Overpriced Stocks

SHORTING OVERPRICED STOCKS
By www.ProfitableTradingTips.com

http://profitabletradingtips.com/trading-investing/shorting-overpriced-stocks
A consensus is gradually emerging
regarding the stock market.

Stocks are pricier than one might
think. barron’s weighs in on the
subject.

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Before We Continue…

the standard & poor’s 500 index
begins the new year with a
price/earnings (p/e) multiple of about
18 times trailing 12-month earnings
per share.

this represents a valuation higher than
about 74% of the time since 1945.

while a relatively high valuation, it
remains far below its post-war record
of more than 30 times earnings in
early 2000, and as recently as the
1990s, the stock market delivered
nice returns from valuation levels at or
above today’s p/e multiple.

most u.s. stocks, however, are much
more expensive than suggested by
the s&p 500 index.

the median new york stock exchange
(nyse) stock is currently at a postwar
record high p/e multiple, a record high
relative to cash flow, and near a
record high relative to book value!

If you are trading an ETF that tracks
the S&P 500 you can look at the
broader numbers.

But if you are trading individual stocks
you need to look at individual
financials.

You will find yourself more often
shorting overpriced stocks than
shorting the S&P 500 itself.

Oil Stocks

In retrospect it would have been great
idea to short stocks in the energy
sector six months ago.

But, how about today? Daily Finance
ask if oil stocks will go up and a good
investment in the coming months.

if you are looking for stocks that you
can “buy low,” the oil sector warrants
some attention.

over the past six months, energy
select sector spdr (xle) — an
exchange-traded fund focused on the
energy sector — has declined about
21 percent

while the s&p 500 (^gpsc) has
increased nearly 5 percent.

the fidelity fund invests in more than
40 companies — including exxon
mobil (xom), chevron (cvx) and
schlumberger (slb) — that primarily
develop and produce crude oil and
natural gas and provide drilling and
other energy-related services.

over the same period, spdr s&p oil &
gas exploration & production etf (xop),
which invests in oil and gas
exploration and production
companies, fell more than 41 percent.

Read the article. The author goes on
to say that those companies with
strong fundamentals are likely to
recover sooner and faster.

Leave shorting overpriced stocks to
the oil companies that are really in
trouble and for whom a prolonged
period of low crude prices will be a
death knell.

Sorting Out the Chaff from the
Wheat

The point of shorting overpriced
stocks is that the market has had a
nice run from the depths of the
recession until now.

It has had better than ten percent
gains three years in a row.

And now as the price of oil plummets
traders are looker deeper into just
why.

Three major economies are in
recession, at risk of recession and
showing substantial slowdowns after
years of fast growth.

These economies are Japan, the EU
and China.

The underlying risk is global deflation
led by more and more oil pursuing
fewer and fewer buyers.

Selectively shorting overpriced stocks
may be the next best way to make
money in the market.

Technical analysis will help pick the
right time.

Shorting Overpriced Stocks

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