Monday, 12 January 2015

Macro Technical Indicators for US Share Market

It's good to look at the macro picture at the start of the year. Previously, I go to different places to get these big picture info. Recently, I've discovered this website vectorgrader that gives me the bulk of the macro indicators about the valuation of the U.S. share market (this website also list a subset of the macro indicators for Japanese and Indian markets).



This Market Cap / GDP is said to be Warren Buffet's favourite indicator. So going by this measure alone, the U.S. market is more expensive now than 2008 bubble era, second only to dizzying 1999 dotcom bubble.

Another macro indicator that's also quite popular in looking valuation of the U.S. market is the Tobin's Q.




Once again, except for the 1999 dotcom bubble, the Tobin's Q indicator is the highest since 1950.

As we know, bubble can always go on much longer than investors expect. For example, the dotcom bubble had already overshot the values that suggested by these 2 indicators as going into the expensive territory by 1995, and yet, the bubble went on for another 5 years.

In theory, this time, it can surpass 1999 peak. But I don't think it's likely. In 1995 investors talked of new paradigm shift because of new technology. This time, they could rely on the QE easing, which ended. But the low interest rate environment still around. The low oil price will give the bull one more ammunition for hoping the market will go even higher. Low oil prices also suggest sluggish world economic strength and deflation.

Only time will tell (we will only have to wait until sometimes in the middle of the year to see if we have a market collapse or not). For now, all we can say is that based on historical analysis of this indicator, the market is way overvalued.

There're also internals that suggest the U.S. Share market is breaking down (I might write about that in the future if I'm up to it). Last but not least, the seesawing nature of the share market lately is telling us that the market isn't sure where it's going.


Since I'm looking at big picture, I'm a top-down strategist, and my plan of attack for 2015 is going to be,

Sell U.S. market.
Buy Sugar, Rice, Cotton, Russia, Gold, Oil (in that order).

U.S. had gone up for 5 years, and macro indicators suggest it's expensive. It had gone up for 13% in 2014. While it looks expensive, even if it go up for, say, another 13% in 2015 (if that), for the balance of risk, it doesn't make too much sense to hold U.S. market. And crazier to buy it.

Having said that, I don't see a sudden collapse of the U.S. market. Back to basic, buy low, sell high. U.S. market is anything but at the low base, and its bull market has been running for more than 5 years. Typically, bull market tend to run for 5 to 7 years.

But many other stuff (literally) - aka commodities -  are at the low base. Everything goes up must come down; everything goes down must come up. Unless one believes in the crazy notion that cycles are dead. Cycles always exist. Bear market is followed by bull and so on as surely as sunset is followed by sunrise, and the whole daily cycle repeats.

Why buy something near the top instead of near the bottom of the cycle?

The buy list is in the order of the time of purchase. I.e. I'll buy these commodities sometimes this year with Sugar first, and Oil last. I might wait more than a year to buy crude oil depending on market actions.

Finally, my strategy is obviously applicable to an intermediate to long term investor, not a short term trader.



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