In the past week or so, I have seen more and more metrics that show the extreme bullishness of the market – perhaps a warning sign of overheating. First and foremost, I am attaching the graph that demonstrated the ratio of Bulls (long equity) vs Bears (short equity). Once it reaches the ratio of 3, it is very dangerous and usually signals a drop to come. As of June 8th, we are at 54.5 to 16.2 – a ratio of more than 3. If you look at what happened in 2000, 2008 and 2020 – you will see that the bigger the gap, the more likely the crash to come and the gap being closed. As I often have contrarian ideas, I think we may be hovering around the top for $SPX500 and $NSDQ100
Many of you love Warren Buffet. Well, his favourite indicator is showing 133%. The ratio is Global Market Cap / Global GDP. To see the graph and read Business Insider article, please follow: markets.businessinsider.com/news/stocks/warren-buffett-indicator-hits-record-high-global-stocks-overvalued-crash-2021-6-1030520442
Bloomberg has run a ratio of Calls to Puts (in the Options market) and we see the same – the ratio shows historical levels of bullishness. In theory, that is positive for the time being, as everyone is buying, pent-up demand is strong, and we are easing the lockdowns...
From experience, I can tell that these warnings signs are extremely important, however, the rally usually lasts longer than expected. With that, it is entirely possible that we will experience another 10-15-20% rally, heating up those indicators even more. Eventually though, we will probably reverse to the mean, as we always do.
What do you think? Are you Bullish or have you already started Hedging?
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