At what level should the JSE Alsi index be?

I remember that, in the second half of 2006, The Citizen/Moneyweb had a business headline "JSE to reach 25,000 by year-end". Well, it came close, with the JSE Alsi index closing the year at 24,915, up a staggering 37.7% for the year.


So what does 2007 hold for investors? More of the upside, or time to be cautious?


If you have been following my articles, you will know that it is time to be very cautious. I have recently performed an extensive analysis, based on the JSE Alsi index since 1960, as well as economic data. My analysis shows that:

- The current market PE is 17.7, which is 65% above the 46-year average of 10.7. Even if we take into account changes in the inflation and interest rate regime and use a "reasonable" PE of 12, the current market PE is still 48% above where it should be.
- The market PE was as high as it is now during 1968 - 1969 and again 1993 - 1994. The market performance immediately after these two periods was pedestrian to dismal.
- Using various measures, the market is currently between 30% to 40% overvalued.

So, although the market could continue to run for a while, the bias is now to the downside.

What does this mean for investors?

1. Take profits, if you have already made handsome profits and are still in the market;
2. Be selective in the stocks you invest. There are few companies that offer value at the moment;
3. For traders, go short Alsi 40 when it reaches 22,500 ~23,000. Wait for a reversal signal.