Q Datapoint of the Day

Remember Pimco’s graph of Q showing it around the 0.3 level? I wasn’t sure where that number came from, and now CLSA’s Russell Napier has come out with a slightly more realistic (to me) number — which is also a lot more bearish.

The Q ratio on U.S. equities has dropped to 0.7 from a peak of 2.9 in 1999, and reaching 0.3 has always signaled the end of a bear market, said Napier, 44, the author of “Anatomy of the Bear,” a study of how business cycles change course.

Napier reckons that Q will go all the way down to 0.3, which would correspond to the S&P 500 trading at around 400. Yikes. All the same, if you’re willing to stomach a possible drop to 400, the absolute value of Q is already significantly below 1, which is one indicator that stocks are cheap — even if they are getting cheaper.

On the other hand, Q will naturally decline over time even if stocks are flat, as the denominator grows — as it’s bound to do if the government starts injecting large sums into corporate America. Indeed, I believe that Q was falling through much of the 2002-07 bull market. Which would imply that it has limited usefulness as an indicator of future stock-market direction.

(HT: Eisinger)

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