If it Looks Like a Bubble?

A recent chart by Michael Lebowitz at 720 Global has caught my eye, which is shown as follows:


10 April 2015 Blog 1

He shows five popular gauges of valuation, including those used by the Federal Reserve and the investing “guru” Warren Buffett. The coloured circles, which represent good historical valuation measures for the S&P 500, are placed where this stock-index would be if investors valued earnings today as they did historically. Based on these, he states that the S&P 500 is adding a 20% to 50% premium over what decades of history suggests is fair value.

Or, to put it another way, the S&P 500 is overvalued by 20% -50%!

Our own analysis, which includes the fundamental measures mentioned above, is combined with technical analysis tools and sentiment guides, including the Socionomic observations mentioned within these posts.

Last October, as the main US stock-indices started to swoon, we updated on “US Margin Debt,” which included a measure of it to US GDP (the light-blue dot above,) and went on to say, “it is taking ever-increasing levels of debt to push stocks higher, and GDP come to that.”

Here is an update of US Margin Debt / GDP:

10 April 2015 Blog 2

Margin debt to GDP actually peaked back in February 2014 at 27.3% (see the lower blue chart of the past two years) versus a respective 27.8% and 26.4% at the two other significant market tops of 2000 and 2007.

Whilst margin debt doesn’t always peak ahead of market tops, it did so at three of the most significant tops, highlighted in red within the larger chart.

So is it a bubble?…..What do you think?





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