Let's review some things

Normally I have view I want to get across, and today will be no different 😊. Last week I heard from many people that they liked Andrew’s blog and I think most of them thought I should step up my game…or let Andrew write them all going forward. Well, I am back this week, so see what you think.

Since we last chatted, I’ve been sifting through lots of data, trying to make sense of what’s happening and where we might be heading.  We’ll take a look at a few charts that have stood out to me and put them in the perspective of our core methodology.

Our methodology looks at three different broad indicators to try and draw a cohesive picture. Those are:

1. Valuations
2. Psychology
3. Trend

Valuations are elevated. No question about that. By almost every measure, I might add. Here is the one that Warren Buffett likes best (click on any chart to view it larger, as we know these get hard to read on this page).

Psychology is stretched. The first chart below shows margin debt rising considerably since COVID. Margin debt allows investors to buy with money they don’t have, by borrowing against the value of their portfolio. The second chart is the ratio of leveraged ETFs and inverse ETFs. Leveraged ETFs represent bullish bets, while inverse ETFs represent bearish bets. The third chart is the AAII bulls/bears, which you can see is running well above historical averages. Keep in mind that psychology indicators are counter-intuitive indicators. When everything looks really good with psychology, history says it’s some of the worst times for investments.

Finally, is Trend. The old adage is ‘The Trend is Your Friend’. I’ll add ‘until it isn’t.’  Today trend looks fine. Nothing to see here. The same could be said for February 2020. Then 16 trading days later we were in a bear market. That’s not to say we will have another pandemic. As a matter of fact, COVID appears to be getting under control. Let’s hope it stays that way. Of course, pandemics are just one way market turn negative, so we have to be ever-mindful of risk while seeking long-term reward.

Here is a chart of the S&P 500 equal weight, which we think is one of the best broad indicators of trend.  The only thing you can say about the chart is it is extended, way above its moving averages.

With daylight savings behind us now and March half gone, we look to spring and warmer weather. We also hope that we can start to see family and friends again in a safe manner. As for the market, valuations are high, psychology is very bullish, and the trend is extended. In our book that calls for caution – while recognizing that markets can stay irrational longer that we all can stay solvent. On that note, I will let you get to something (anything) more fun than reading this.