Thursday, August 11, 2016

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.


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.


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.


  1. I don't know what kind of methodology is used behind the sw but what I have historically noticed is that it is impossible to calculate using historical financial figures how expensive or cheap a stock is. This is simply due to the changes in the growth factor which can not be estimated.

    All in all, stocks in current stock market are insanely expensive compared to historical values. However, experts say that this is due to 0% interest rate environment which would imply stocks are still cheap. As there is no way I can predict market tops or bottoms, I continue buying on a monthly basis stocks with strong financial history from different sectors.

    1. I think you have a valid point here. Over the long term, I don't really know how much it matters. Consistently buying will allow you to cost average over a longer period. Good point. Thanks for the comment!

  2. Those are good charts to look at. It is interesting how the first three companies were frequently above the "valuation line", yet their prices kept marching higher. Rising earnings, and dividends will eventually bail out the shareholder who may have overpaid. If they don't grow however, you may not generate good returns, even if you buy at "fair values" ( as was the case of SO)

    Of course, it would be interesting to see the 15 year returns with dividends reinvested, rather than simply price too

    1. Hi DGI, yes, this is not taking into account accumulated dividends or the growth of them. So as an entry, I think the above are too pricey, but as you state, if you were to buy this high, and the dividends grow, you would probably be ok. Thanks for commenting!

  3. I like and use FAST graphs as one way to determine fair value for stocks I own or are interested in owning. I'm not an expert user, though. One thing I do know is that changing the coverage period (you selected "ALL" in all cases) could change the picture, especially for stocks that are not dividend stalwarts. Anyway, great exercise and I look forward to reading part 2.

    1. Hi FerdiS. Very true, looking at different ranges could affect the analysis. I wanted to get as much history on these companies to see what patterns have formed. It is interesting just to think about what "fair value" even means.... afterall we are all just buying and selling a virtual piece of paper with some voting rights that most don't even exercise. ;) Thanks for the comment!

  4. Yep. These are hot companies. It is definitely tough - very tough to buy now. There are some companies out there you can buy, so I look forward to part two.
    Thanks for sharing.

    1. Hi D4s! As I was doing my analysis of the above, I ran into a few that actually looked pretty good, so I decided to make it a two part-er. I look forward to seeing what others think of my finds as well. Thanks for stopping by!