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Measure the value of the stock market using the Q-Ratio valuation method
The Q-Ratio, developed by the economist James Tobin, is a market valuation method used to estimate the fair value of the stock market. It is calculated by taking the total price of the market and dividing it by the replacement cost of all companies in that market.
The data used to calculate the Q-Ratio is obtained from the Z1 Flow of Funds of the United States report, which is released quarterly by the Federal Reserve. The Flow of Funds time series we will use can be downloaded by the following item: Federal Reserve Flow of Funds - Balance Sheet Historical Data.
The total price of the market is not calculated based on the total stock market capitalization; it is obtained from the following time series: nonfarm nonfinancial corporate business net worth (market value) - Ticker Symbol: ^FL102090005.Q
The replacement cost is obtained from the following time series: nonfarm nonfinancial corporate business corporate equities liability - Ticker Symbol: ^FL103164003.Q
This economic trading indicator simply divides the second time series by the first one.
The analysis of the Q-Ratio shows that its average value over the last 20 quarters is 0.9179, while the last Q value is 1.0402. The Q-Value is usually compared to its moving average; a value higher than the average means that the stock market is overvalued and a value lower than the average means that the stock market is undervalued.
Other stock market valuation methods include the cyclically adjusted P/E (price-earnings ratio) and the price to book, which are two stock valuation ratios usually calculated based on the S&P 500 companies (S&P Earnings, S&P 500 Earnings and Price Earnings Ratio Estimations).
The indicator is called "QRatio" and it doesn't require any parameter; example:
a = QRatio();
Plot(a,"Q-Ratio Valuation Method",colorGreen,chartLine,styleOwnScale);
Trading financial instruments, including foreign exchange on margin, carries a high level of risk and is not suitable for all investors. The high degree of leverage can work against you as well as for you. Before deciding to invest in financial instruments or foreign exchange you should carefully consider your investment objectives, level of experience, and risk appetite. The possibility exists that you could sustain a loss of some or all of your initial investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with trading and seek advice from an independent financial advisor if you have any doubts.
