How to read a valuation Z-score
A Z-score turns "is this cheap?" into a single number. Here is what it measures, how to read it, and where it falls short.
[PLACEHOLDER OUTLINE: replace this post with the final text.]
What a Z-score measures
A Z-score tells you how far a value sits from its own average, measured in standard deviations:
Z = (current value − long-run average) ÷ standard deviation
A reading of 0 means "about average". A reading of +2 means "two standard deviations above average", which is unusual. A reading of −2 is unusually low.
Reading the dial
| Z-score | Plain-English read |
|---|---|
| Below −2 | Unusually cheap against its own history |
| −2 to −1 | Cheaper than usual |
| −1 to +1 | Around normal |
| +1 to +2 | More expensive than usual |
| Above +2 | Unusually expensive against its own history |
[DRAFT: explain which valuation measures feed the composite Z-score, at whatever level of detail you are comfortable publishing.]
Where it falls short
- History is not destiny. A market can stay "expensive" for a long time.
- The average itself can drift as conditions change.
- A single number hides detail. That is why valuation is only one of three inputs.
[DRAFT: one paragraph on how trend and risk inputs cover these gaps.]
How it fits the signal
[DRAFT: show where the Z-score appears in a signal post, using a clearly labeled example.]