Investors scrambling to find that small tidbit of good information about the markets and subsequent exchange traded funds (ETFs) should take a moment and absorb the wisdom of one our great academic minds.

Professor Robert I. Shiller of Yale University has created the useful tool, the cyclically-adjusted price-earnings ratio (CAPE), that helps measure stock market valuations, reports Henry Blodget for Yahoo! Finance. The CAPE shows a picture of the market’s value regardless of business cycles.

He has provided this tool because profit margins are mean-reverting. Taking single-year P/E ratios would provide misleading market values. Stocks would look cheaper in boom years, because of high profit margins, or stocks would seem expensive in bust years, because of low margins.

Shiller’s P/E has fallen below fair value for the first time in 15 years, with the market’s cyclically adjusted P/E under 14X, long-term averages around 15X. Shiller is waiting for the P/E to drop below 10X, which other major market lows have also done.

Also according to Shiller, the housing sector is nowhere near its bottom, remarks Henry Blodge for Yahoo! Finance. The Obama plan for a market turnaround won’t be as quick to affect the housing sector and U.S. house prices are likely to have only fallen halfway to fair value.

  • iShares FTSE NAREIT Real Estate 50 (FTY): down 3.9% in the last week; down 9.9% in the last month

ETF FTY performance

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.