A US chart to sharpen the mind

So, the US earnings season has so far avoided any major upsets. Indeed, most US equity markets have returned to all-time highs; but not all. In reigniting the discussion about company valuations, Federal Reserve chair Janet Yellen appears to have pulled the rug from under American small-caps.

"Valuation metrics in some sectors do appear substantially stretched - particularly those for smaller firms in the social media and biotechnology industries, despite a notable downturn in equity prices for such firms early in the year," said Yellen in her latest congressional testimony.

Currently, the Russell 2000 is trading on over 19 times forecast earnings compared with an average of around 17 since 1998. Yellen also points out that: "Valuation measures for the overall market in early July were generally at levels not far above their historical averages, suggesting that, in aggregate, investors are not excessively optimistic regarding equities."

On that note, it's definitely worth checking out a pair of charts included in The Reformed Broker blog written by Joshua Brown, a New York City-based financial advisor at Ritholtz Wealth Management. It's an article that certaintly gives food for thought and is worth repeating in its entirety here.

Joshua Brown -The Reformed Broker blog

Collision Course

Two phenomena, occurring simultaneously, on an unavoidable collision course with each other - professional investors are selling (or shorting) the US stockmarket as individual investors plow in full speed ahead…

CNBC.com:

"Looking at all stocks in the S&P 500, the median stock has a short interest of 1.73%, far above the average median short interest, according todata analytics provider OTAS Technologies. This is just about the highest median short interest has been since September 2012. (OTAS prefers to look at median, rather than mean, short interest, because stocks with especially large or small short interest skew the latter measure.)"

And now Bloomberg News via Zero Hedge:

"Individual investors are plowing money back into the US stockmarket just as professional strategists say gains for this year are over. About $100 billion [£58.4 billion] has been added to equity mutual funds and exchange-traded funds in the past year, 10 times more than the previous 12 months, according to data compiled by Bloomberg and the Investment Company Institute."

And the chart via Merrill Lynch's quants (annotated by Tyler) that depicts this:

Josh here - Everybody can't be right in the end. This is a pretty stark divide. If the pros are right, we're at a cyclical peak and a plummet happens sometime this year - or at least before any further upside. If the Joe's are right, we're in a secular bull market and the cyclical peak will hurt, but not so badly.