Trader’s Narrative

Below is an interesting chart courtesy of Ford Equity Research. It is a comparison of their PVA ratio and the Ford Universe Price Index:

Ford’s price to value ratio (PVA) is computed by dividing the price of a company’s stock by the value derived from a proprietary intrinsic value model. A PVA greater than 1.00 indicates that a company is overpriced while a PVA less than 1.00 implies that a stock is trading below the level justified by its earnings, quality rating, dividends, projected growth rate, and prevailing interest rates.

Click to see a larger version of the chart:

It seems to correctly identified major tops but a bit early. As you can see, the 1987 top corresponded to a 1.81 reading which means that prices were almost double what they should have been. The PVA ratio also found the Tech bubble in late 1999 at almost the same level of over-valuation.

The next top is not as clear cut. The PVA spiked to 1.62 in mid 2005 when the S&P 500 was trading at 1200. In the next 2 years it would rise another +350 points before topping. But by then, the PVA was lower. Right now it stands at par.