Chart Analysis in an Overbought Market (JNJ, MCD, MMM, CLX) - Part 1

This is part 1 of a 2 part post about the current state of the markets. I am not going into any length to describe the factors playing into the market, but instead I want to look at individual stock charts to paint the picture for us.

The second part of this will focus on stocks that still look reasonably valued. Again, this will be purely based on the stock chart analysis.

 Stock 1 - CLX

 

According to the FAST graph, it appears CLX is overvalued right now. While investors have always been willing to pay a premium on this stock (as witnessed by the black line above typically being higher than the orange line), it is venturing far away from the orange line. Simple terms, but what does this mean? It means the stock price (black line) is climbing much faster than earnings (orange line). It ventured this far previously, back in 1998 and it corrected back down toward the orange line.

Stock 2 -JNJ

 One of my favorite stocks, Johnson & Johnson. Again, we see from the graph that since 2012, the stock has been at a premium to its earnings. In 2013, it started to decline back toward the orange line, but then bounced off it and is currently at all time highs and way above even projected earnings. At $123 stock price as of the writing of this article, it is 20% overbought, just according to the graph and earnings.

Stock 3 -MCD

Another example is McDonald's. Over its history, it has stayed on par with earnings for the most part. Starting in 2010 though, investors have paid a premium for the stock and most recently MCD has had a huge run up again to all time highs and way higher compared to projected earnings. I am not suggesting that paying a premium is bad, but it seems as though investors are paying a premium based on 2017/2018 earnings, and not the present.

Stock 4 -MMM

3M is a great company that I own, but once again, we see (since 2012) the stock running way ahead of earnings. In cases like this, it would not surprise me to see the stock price level out at this point until the earnings catch up. Just like MCD above, it appears that investors are looking out at future earning forecasts and paying a premium based on those numbers, not the present.

Conclusion

If you don't trust the FAST graph method, which I understand as its just a graph, let me provide one final example. Since 1997, Southern Company (NYSE:SO) has been tied very closely to its earnings.  That is 20 years of data to suggest that looking at these graphs in this manner, does paint a convincing story of where the stock price is at. Obviously, there are many other factors that weigh into a stock price, other than earnings, such as world events, elections, economy numbers, jobs, etc... I am not suggesting in any way that these are not great companies either. I own all but Clorox and will continue to hold.

The reason I am highlighting the companies above and their FAST Graphs is because I want to put some real world data to all this talk about the stock market being overbought and ready for a correction. That being said, in Part 2, I will show some stocks that I have found that have very attractive looking FAST Graphs.

Let me know what you think of these charts. How much faith do you put into them? Would you continue to buy the stocks above even at these prices?



Note: I am not an affiliate of FAST Graphs so I will not make any money from this article from FAST Graphs. I just find them very useful and am a regular subscriber.


Long MMM, MCD, JNJ

Disclaimer: I am not a licensed investment professional. I am not liable for any losses suffered by any parties. Any information on this site is my opinion only and should not be used for investments of any kind. History does not always repeat itself, do your own homework.