My thoughts on the stock market again...
Hello Steemians! 3 months ago I posted my thoughts on the stock market at the point in time and back then I presented several metrics that indicated that the stock market is overvalued. I concluded that we still had some room to grow and would possibly make new all-time highs (ATH) before we see a correction. The stock market eventually made new highs with the S&P 500 index getting above 2900. However, since 3 Oct 2018, the market started to move lower and now it is back to the 2650 region, erasing gains made so far in 2018.
With the market down almost 10% since its peak, the question is really what will happen next. Being someone who is focused on the long-term, I like to look at macro metrics again to provide me with some directions.
Shiller PE and Buffett Indicator
In the same post, I introduced the Shiller PE and Buffett Indicator. I will like to again refer to these metrics and understand where are we now in the stock market.
Let's first take a look at the current Shiller PE ratio:
Source
3 months ago, the Shiller PE was 32. Now it is still at almost. Not much has changed despite the recent downward movements and we are still greatly overvalued based on this metric. As a refresher, the Shiller PE tends to revert to its mean on the average over 8 years. At the current level, it is still likely that we will make -2.3% return annually if it does go back to mean after 8 years.
Next, lets take a look at the Buffett Indicator. Based on source from GuruFocus, we are still significantly overvalued.
As of 2018-10-25 (updates daily):
The Stock Market is Significantly Overvalued. Based on historical ratio of total market cap over GDP (currently at 139.9%), it is likely to return -1.7% a year from this level of valuation, including dividends.
Where are the Smart Money Going?
Yesterday I read this article from Bloomberg which is quite worrisome in my opinion. It says that there are many retail investors (Mom and Pop investors) buying the recent dip while the institutional investors are actually selling.
Taking a look at the smart money flow index, the index has been plummeting since the start of 2018 and are still continuing to head downwards at a rapid pace.
Source
This indicates that "smart money" have not started to accumulate yet and it is generally not a good sign in the near term.
Conclusion
The market is hard to predict, hence it is always better to focus on the long-term. In the short-term of about 3 months to 1 year, I think the market is going to rebound and possibly make new highs again. However, we are still in an over-valued market and in the long run we are to see its effects.
I will like to take this chance to introduce a free book from Ray Dalio, Navigating the Big Debt Crises. It is available free in PDF format and the essence of it are found in the first 65 pages of the book. I strongly encourage you to read it and you will be able to understand at which stage are we in the big debt cycle. In Ray's opinion, the market still has room to get higher in the next 1-2 years. However, by then we will be at the end of the big debt cycle and the next crash will be huge, deep and far-reaching. Here is a video of the interview Ray had with Bloomberg. It is a good summary of what he thinks.
In the video, Ray mentioned that the next crisis may bring a 30% devaluation of the USD. Which makes me think that cryptocurrencies that are deflationary (e.g. Bitcoin) might just be the perfect hedge for such situations. I have often tell my friends that by buying cryptocurrencies, you are not just investing, you are also hedging against the risk of fiat currencies.
Thanks for reading! Let me know what you think about the current stock market. And what are you doing to navigate through this situation? If you like what I am doing, do give me an upvote/follow!
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Thanks for sharing your points about the Shiller and Buffet indicators as well as the smart money index. These are very important for figuring out the sentiment of the market within the WHALE community. lol
However, on the weekly chart, stocks have yet to break that 200 day moving average, and are still technically in an up trend.
Check out the video I posted. In it, I talk about my macro outlook on the markets. https://steemit.com/stockmarket/@cryptomeeks/l7hdncjv
Thanks for reading! Yup, I agree that if you zoom out the chart, the upward trend is still there. My opinion is this is just a correction and the market is still on track to make new highs. There will be opportunities to make some quick gains in the next few months or a year. That being said, fundamentally, it is already quite over valued and we are also near the end of a huge debt cycle. Hence, we have to thread carefully in the long run
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Nice Avatar pic btw, I think we used the same source lol. Good to see you have a long term perspective in mind and aren't trying to be a crystal ball BS artists. I need more people like you in my feed. I look forward to reading more of your content. Thanks.
Haha.. yea, I think we get from the same source. Thanks for the follow, I have done the same as well :)
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If we liquidate during the close you are going to see the largest 1 day drop in the history of the Dow...you heard it here first
Did we liquidate during yesterday's close? I read your post as well. It was quite insightful
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No we didnt, it was bought but I solde due to some big earnings and a gut feeling that the acceleration of the downtrend was to steep. Today we had an indecision candle but the weekly close looks like dogpoop. I think there is a 95% chance the low was not this week
Maybe the market will settle down, after all the trade wars that are going on at the moment are over. :-)
The trade war doesn't seem to be ending any time soon. But I do hope things get better :)
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Hi brother,
I have not read the whole article yet (my apologies) but I hopefully will in the evening and then come back here. You know I am pretty busy at the moment.
I have just to say one thing right now, stock market is in a critical spot - it definitely has the potential to start correcting soon but it ain't dead certain. Maybe a good sign for cryptocurrencies - at least I think it is but as many other times, we will have to wait and then see what happens.
Maybe there is some "inverse relationship" between these two markets, just maybe - when stock goes up, crypto (btc) goes down; when stock falls, crypto rises.
And so far I generally agree with your opinion.
Greetings my friend!
Thanks for dropping by bro. I do hope that cryptocurrencies will become an asset class with no correlation with the stocks market. So far things have been relatively stable in crypto market despite the stock market correction. I hope I don't jinx it though :)
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Of course, I always try my best. I completely agree with you, brother. Yes, I hope too. (:
Finally, I read it to the end. I just have to say I generally agree with you on your listed points - overvaluation of the stock market, probability of an onset of a correction (should not be too big, not as big as crypto haha), hedging etc.
I can tell you what I did and am going to do: First of all, do not be hasty and keep calm. We are in a big bullish three wave (Elliott Wave) and probably a smaller fifth wave or some sort of correction wave (not sure here - we need to wait a little longer to know where we "exactly" are). A few days ago I sold some shares. Since then I am only waiting for the market to move (up or down) - do not fight the trend. ~2,550 looks like a major support area. If this area does not hold I will sell and short the market. Do not forget your stop loss positions of course. If it holds I will start buying again.
It logically always depends.
Btw. regarding one of your headlines of this article "Where are the Smart Money Going?" - it actually is "Where IS the Smart Money going?"; except you are writing slang (or I am misunderstanding smth.).
Cheers my dear brother (:
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