The Buffet Indicator is Flashing Red!!

May 9, 2020

Everyone knows by now that Warren Buffett sold out his positions in the airline stocks this past week. He is now sitting on 137 billion dollars in cash and has not made a significant purchase since 2016. If he is the grand daddy of all great investors why isn't he participating in this rally off of the "Corona Bottom?" The reason is the Buffet Indicator.

The Buffett Indicator, as the industry calls it, is the Wilshire 5000 Total Stock Market Index divided by quarterly Gross Domestic Product (GDP). Mr. Buffett believes this is the best single metric to determine if the overall market is overpriced.

As you can see, the Dot Com Bubble burst in 2000 when the Indicator was at about 118. Then during the Financial Crisis of 2008 it hit a high of 100. Now it is at an astounding 180! It has been overvalued for years. All this says is that people are paying higher and higher valuations for these stocks. Earnings are not keeping up with the stock price. In fact, during the "best economy ever" of 2019 the stock market had no appreciation of earnings but went up 30% anyway. The disconnect is real and Warren Buffett doesn't like it.

In order to resolve this disconnect, one of two things or both things have to happen to bring down that indicator. Either GDP has to go up dramatically, remember it didn't go up at all during the good times, and/or the stock prices must fall dramatically. My bet is that we are in for another downturn starting sometime in May.

Unemployment is currently at a high that hasn't been seen since the Great Depression. Sixty-five percent of this economy is driven by the Consumer. If unemployment stays in the double digits for quite sometime then it is safe to assume the GDP will not be accelerating, but rather contracting. This would send the the Buffett Indicator even higher until investors start to get nervous and cash in on the recovery gains they made off the bottom.

This is why technical analysis is so important. We caught the bottom at around March 30th and ran it up to where it is currently. We are waiting patiently for signals to step aside for a while so that the market can take a breather.

Students of History will remember after the initial phase of the 1929 crash the market went up for 5 months and then sold off for the next two years. We learned one thing after studying markets for 25 years and that is anything can happen....really anything.

As the saying goes, "In May go away..."

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All content is provided as information only and should not be taken as investment or trading advice. Any investments, trades, and/or speculations made in light of the ideas, opinions, and/or forecasts, expressed or implied herein, are committed at your own risk, financial or otherwise. For further details, please refer to the Disclaimer.