Posted January 13, 2021
By Sean Ring
On the Edge of Another ‘08 Crash?
Welcome to the Rude Awakening for January 13, 2021…
Recording about an hour before market open, we are seeing some weakness coming into today.
You know, we are sitting at all time highs in the marketplace, and the real question is…
Should We Be Preparing for a Down Move?
As the old saying goes: The market can stay irrational much longer than you can stay solvent.
Just because the market is overvalued right now, doesn’t mean it can’t become even MORE overvalued with time.
So, as traders, we need to look at the hard numbers to make our trading decisions. We don’t have a crystal ball, but we do have have tools, metrics, charts, valuations and you have me and my decades of trading experience to help guide you through it all!
We’ll base our decisions not off of emotions but math!
So, I’d like to share a tool with you today that we haven’t discussed before.
What’s known as…
The Buffett Indicator
There are myriad ways we can calculate valuations in the markets to determine whether something is over or undervalued.
But at the end of the day, one of the most effective historically also happens to be one of the simplest.
Warren Buffett popularized this indicator.
It takes the global market capitalization of all stocks trading in the world today, divided by the world’s global domestic product.
Taking the real companies backing all the stocks people are trading day in and day out, and putting them up against the money being made and transferred across the world, we can get a pretty darn accurate picture of the market’s true value.
The Buffett Indicator is of interest today because as of the last few days, it is at a 13-year high. It is at the most overvalued level it has been since just before the ‘08 crash.
As Market Insider reports:
Warren Buffett's preferred market gauge has jumped to its highest level since October 2007, suggesting worldwide stocks are the most overvalued since the financial crisis.
"Buffett indicator sounds the alarm," Welt market analyst Holger Zschaepitz tweeted. "Global stock mkt cap has now topped 120% of global GDP, and thus the same level as before the crash in 2008."
The idea is, when this indicator trades above 100%, the market is overvalued. Just prior to the ‘08 collapse, we hit the same levels we are at today.
Buffett believes this is the best single measure of where markets stand at any given point.
So, looking at today’s market, I don’t think there is any question markets are overvalued, nor do I think it would take much to push them down.
But, again, markets can stay irrational a lot longer than we can stay solvent. However, there WILL be another correction. We just don’t know how much higher it will go before that happens.
We will continue giving trading ideas, guidance, and analysis in all our videos, monitoring the markets as we do every day.
But remember, trade safe, keep your stop losses in place, and always make sure to have at least one bearish position in your portfolio…
We will talk to you tomorrow!
Editor, Rude Awakening