3 charts to ponder over the weekend

Here are some interesting charts taken from various sources. I thought you’d enjoy them…

 

Canadian real estate bubble

Its real, and its worse here than you may think:

Cheap vs expensive sectors

I’ve put green boxes around sectors trading below their historic valuations. I’ve circled in red the sectors that are trading above their historic valuations. Note that many of the defensive sectors – which have held up the best in the recent bear – are now the most expensive (and probably most vulnerable to underperformance when the bear ends). Specifically, utilities, staples and real estate stocks are very pricey. Energy, materials, communication stocks and financials are relatively cheap. Tech has come down from irrational levels, but is still over its long termed valuation levels. Consumer discretionary stocks are expensive too.

 

When will the pain end?

I’ve noted recently that while investors are certainly worried of late, and that worry shows up in retail (dumb money) money flow patterns and surveys, it does not yet show the outright “puke” phase happening yet. Bear market bottoms are often  marked by investor despondency, capitulation, and morbid fear of the future. All that good stuff.

If you read my book Smart Money, Dumb Money – you know that one of the key contrarian indicators I watch for market extremes is the VIX. I also cover this indicator, along with others, in my Online Technical Analysis course.

The VIX shows irrational exuberance (too much positive sentiment) when it breaks below 12. That’s  when the greatest fool has been looed into the market to make his or her fortune. The game is coming to an end at that stage – and we saw that level form 2017, right up to 2020. Bitcoin, meme stocks, you name it. 30 year old’s still living at home with mommy were making a fortune off of their new-found genius. The VIX can signal early, as it did in early 2020, but history shows us its pretty much always right, eventually.

The VIX shows deep levels of fear and loathing when it breaks above 35, and is particularly accurate if it breaches 45. That’s when the bear market is typically coming to an end, and the fools have capitulated by selling out. Note the spike before the 2020 COVID crash. The world was coming to an end. Perfect VIX signal.

As an aside, I met with my banker the other day to discuss my business mortgage, and she noted that her retail clients (dumb money) are selling their  mutual funds (bought by the dumbest of the dumb money) and moving into GIC’s. We’re getting there, and the VIX recently played in my vital 35-zone before retreating. But the VIX is not yet signaling outright capitulation, which usually occurs above 45. If and when it gets to that level, it tends to be the signal for an end to the pain. Sure, 35 could be all that we see. But it would be a better signal to see near or above 45.

 

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