Go Tactical or Go Home - Part III   
"Tamper-Proof" market indicators show massive overbought levels.
 
This final installment in our series looks at what are considered "tamper-proof" market indicators, meaning indicators that don't involve creative corporate accounting.


The above chart is brought to us by Doug Short who says, "About the only certainty in the stock market is that, over the long haul, over performance turns into under performance and vice versa. Is there a pattern to this movement? Let's apply some simple regression analysis ... to the question."

To read the chart, look at the area graph just below the S&P price graph. The peak in 2000 marked an unprecedented 141% overshooting of the trend - substantially higher than the 86% overbought level of 1929 just prior to the Great Depression and higher than the peak reached in 2007 prior to the Great Recession.

We are currently at 88% above trend level, the 2nd highest overvalued level in nearly 150 years!
 
 

Warren Buffet's Market Cap to GDP valuation indicator has become popularized in recent years. Back in 2001, Buffett commented in a Fortune Magazine interview that "it is probably the best single measure of where valuations stand at any given moment."


The "Buffett Indicator" is basically hovering around its 2nd highest level ever, and even the Oracle of Omaha could be becoming more cautious. Indeed, that quite possibly could be the case, as Berkshire Hathaway recently disclosed they have over $70 billion sitting in cash.
 
Sources: Wilshire Associates, Wilshire 5000 Total Market Full Cap Index© [WILL5000INDFC], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/WILL5000INDFC, October 26, 2016. US. Bureau of Economic Analysis, Gross Domestic Product [GDP], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/GDP, October 26, 2016.

Very similar to the Buffett Indicator, the chart above shows the Wilshire 5000 Full Cap Price Index divided by GDP. The Wilshire 5000 is a market-capitalization-weighted index of the market value of all stocks actively traded in the United States.

Yes, you see that right. By using this alternative method, we're staring right down the barrel of the highest overbought stock market levels in this indicator's nearly 46+ year history.
 

Bottom Line: 

Any objective look at the above "tamper-proof" charts again tell us we may be headed for subdued market returns for the foreseeable future. Intuitively, it makes perfect sense. After watching the U.S. stock market rise over 200% during the past 7.5 years, wouldn't we expect things to slow down?

Again, we are not saying you should sell everything and go to cash. We don't make market calls like that. However, if indicators are telling all of us that the market is overvalued and overbought, then tactical and alternative strategies can have you better prepared for what could be a time of sideways at best or declining markets at worst.

 
We hope you found this series to be eye-opening and informative.
 
 
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Optimus Advisory Group manages liquid tactical and alternative investment strategies that meet the needs of our clients.  We use a disciplined, quantitative methodology to build and manage our portfolios.  Over a full market cycle, these strategies are designed to provide superior risk-adjusted returns while maintaining a low-correlation to traditional market indices. 

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Disclosures

The performance results shown include the reinvestment of dividends and other earnings. Comparison of the Optimus Advisory Group Programs to any other indices is for illustrative purposes only and the volatility of the indices used for comparison may be materially different from the volatility of the Optimus Advisory Group Programs due to varying degrees of diversification and/or other factors. Different types of investments involve varying degrees of risk and there can be no assurance that any specific investment will be profitable. Optimus Advisory Group does not make any representation that the Optimus Advisory Group Programs will or are likely to achieve returns similar to those shown in the performance results in this presentation. Optimus Advisory Group reserves the right to trade different funds within their models.   

 

The historical S&P performance results (and those of all other indices and index funds used as proxies for indices) are provided exclusively for comparison purposes only, so as to provide general comparative information to assist an individual client or prospective client in determining whether the performance of the Optimus' portfolio meets, or continues to meet, his/her investment objective(s). It should not be assumed that any Optimus portfolio holdings will correspond directly to any such comparative index.    

 

Different types of investments and/or investment strategies involve varying levels of risk, and there can be no assurance that any specific investment or investment strategy (including the investment strategies devised or undertaken by Optimus Advisory Group) will be profitable for a client's or prospective client's portfolio. All performance results have been compiled solely by Optimus Advisory Group and have not been independently verified.   

 

The Optimus performance results do not reflect the impact of taxes.