Morningstar says the market is fairly valued based on their universe of estimates. Yet their calculation data is a black box. Thus the most useful way to use Morningstar’s indicator is to compare where it is today to where it has been in the past. On such an analysis, we actually see it as moderately over-valued.
This is because, as seen above, Morningstar’s indicator has rarely climbed high into their over-valued zone, yet in contrast has at times fallen very deep into their undervalued terrain. Thus if today the market is in the slightly over-valued area based on Morningstar’s fair value baseline, then on a relative basis it is actually at above-average valuation levels when compared to where their indicator has been historically.
This means we can ignore their black box baseline for fair value, compare their data to its own average, and find Morningstar data supporting moderately overvalued camp. This adds to our valuation debate from yesterday, where indicators showed the market as moderately overvalued both here and here. We want to find the market under-valued, but it’s a struggle.
For the near term, markets that sit somewhere between extreme over- and under-valuation are likely to be highly susceptible to both upside and downside event-driven swings. Thus if one can’t call market valuation with conviction perhaps simply being long volatility, via options, is the easier way to go.
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