Charts! Bubble Indicators are Everywhere, except our Sotheby’s?

On August 10th, IAV published a Bubble Update wondering if there should be more concern for a bond market bubble rather than stocks (some may argue, we should have concern for both). Our bubble indicator, Sotheby’s had peaked at the end of July and suffered a rather sharp correction compared to the market over all.

Link to August 10th Post:

Bubble Update, Part II – Yields indicate Stocks are OK, but Bonds???

The stock market is esp. acting bubbly now, but this was also considered the case when FED Chairman Alan Greenspan made his famous “Irrational Exuberance” speech in December 1996, 4 years before the actual bubble burst.

  1. As of Friday, October 6th, many typical bubble indicators are over the top: the Relative Strength Index (RSI) for the S&P500 shows the market is way overbought! Top: Just the S&P500 RSI and Below it, the S&P500 with the RSI Source: Bloomberg, WSJ-The Daily Shot
  2. VIX closed at a record low of 9.19 on October 5, 2017, trading at 10.47 on October 9th. The previous low was 9.31 in 1993. Shorting the VIX is one of the most popular trades out there currently, oversold?
  3. Berkshire Hathaway’s cash balances are at record levels. And similar to the private equity world, the universe of investment opportunities is out there, but hiding? Still high cash positions indicate purchasing power and/or a gloomy outlook. These are not necessarily bubble indicators.Source: @gadfly; Read full article

  4. Non-Financial Corporate Debt is at Bubble Heights  –  This chart is scary!Source: @WhatILearnedTW, @calamos / WSJ-The Daily Shot

  5. Here is an illustration of what many consider to be “market bubbles.” Will a correction in the FANNGS burst the stock market bubble? 

    Source: @jessefelder; Read full article

    But, Sotheby’s is only slightly recovering from a drop after our August posting:                                                                                                                    ⇓

Sotheby’s (BID, black) vs. S&P500 (blue) – 1986-today. Nothing seems to bring the market down…

Source: Bloomberg

Think of FED Chairman, Alan Greenspan’s Irrational Exuberance 4 years before the actual Dot.Com peak and what proceeded to transpire…

Source: Bloomberg

The market (blue) kept on going with an Emerging Market and Oil price collapse in the midst plus the demise of LTCM, but the lure of the Internet and all its appeal drove the market into bubble territory. Japan (green) by the way never recovered from their financial crisis which started in the early 90s and the EuroStoxx 50 (pink) struggles since the property bust in 2008. People will say it can be attributed to bank shares. And now look at that DAX (gold)!

Greenspan’s comment was made during a televised speech on December 5, 1996 (emphasis added in excerpt):

“Clearly, sustained low inflation implies less uncertainty about the future, and lower risk premiums imply higher prices of stocks and other earning assets. We can see that in the inverse relationship exhibited by price/earnings ratios and the rate of inflation in the past. But how do we know when irrational exuberance has unduly escalated asset values, which then become subject to unexpected and prolonged contractions as they have in Japan over the past decade?” — “The Challenge of Central Banking in a Democratic Society”, 1996-12-05

Greenspan was cautious then and so are most investors today and therefore the abundant talk of bubbles. Passive investing together with ETFs fuel the market higher and these strategies also need sound active managers to provide balance. Companies start to invest and pay personnel more. This should fuel confidence and still more optimism. Still we cannot afford to throw caution to the wind. There are always those Black Swans looming…

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