Instructions

1. o

1
Find the price-to-earnings ratio, which is widely published for individual stocks and broader markets on Yahoo! Finance, MSN Money and other financial websites !he "#$ ratio of a stock is e%ual to the price divided by the earnings per share, which is the net income minus preferred dividends, divided by the number of outstanding shares

2
&ompare the "#$ ratio of a stock to its industry peers and the overall market ' stock that is trading at a comparatively lower "#$ ratio than its peers or the broader market could be undervalued, while a stock trading at a higher "#$ ratio could be overvalued (owever, a stock price might be low because the company is in serious financial trouble, reports )ohn * Schoen of MSN+&

3
$valuate the valuation of broad market averages Yale professor ,obert Shiller uses historical earnings of Standard - "oor.s /00 stocks to determine if the broad market is undervalued or overvalued !he S-" /00 is a broad measure of /00 large 1 S public companies 'ccording to the *all Street )ournal, Shiller used this method to correctly predict the 2000 tech crash and the 2003 housing crash ' pricey market can still trade higher, but at least you can e4ercise some caution in your individual investment decisions Similarly, a falling market can continue to fall before stabili5ing and trending higher

4
&onsider both sales and earnings, suggests SmartMoney maga5ine columnist )ames + Stewart in a February 2066 *all Street )ournal article $arnings are important, but companies that demonstrate healthy year-over-year revenue growth are more attractive (e uses a "#$ threshold of 67 to determine overvaluation or undervaluation &ompanies that have higher growth rates, such as new technology companies, tend to have higher "#$ ratios

5
'ssess the market sentiment Scan through news stories and listen to stock analysts on various business media outlets to get a sense of it "ervasive gloom and doom might indicate undervaluation, while a sky-is-the-limit euphoria could indicate overvaluation (owever, research cited by *all Street )ournal reporter )onathan &lements indicates that market timing is a risky strategy that rarely outperforms a patient buy-and-hold strategy

6
1se technical analysis, which forecasts future price trends based on historical data ,elative strength inde4 is a common technical indicator, which measures the speed and change of stock price movements on a scale of 5ero to 600 'ccording to +ullseyesto4 com, an ,S8 above 90 indicates overvaluation and an ,S8 under :0 indicates undervaluation Yahoo! Finance, MSN Money and other financial websites provide free technical analysis tools