Are we in a bubble? We’ll look at some charts of housing and the stock market today to see if evidence leans that way. Keeping in mind that even if we ARE in a bubble, we still don’t know exactly when it will burst. But we can have a strategy to deal with it if or when it happens. That’s what today’s blog is about. Knowing where we are, and having a plan to deal with whatever comes our way. Lets get started:
“Buy when you are scared to death; sell when you are tickled to death.” –Old Market saying
Real Estate
Lets look at real estate in Canada before getting to the stock market.
Canadian housing market is in more danger than other housing markets
Economist David Rosenberg notes that home-price to rent and home-price to income the numbers in Canada are higher than they were during the U.S. real estate bubble in the early 2000s. The rampage is so strong that not only are there multiple offers for houses willing to pay exorbitant asking price premiums, but some are buying sight unseen (virtually). And 1 in 10 buyers are learning the bank appraisal is below what they are paying for their house! Sounds like 2006/7 when you bought high “knowing” it would go higher. Until it didn’t.
Below is a chart (I believe the source is Stats Canada) updated to the end of March for Canadian housing sales that goes back to the 2007 housing bubble. Note the 10 year Simple Moving Average is around 40,000 monthly sales. Since the COVID crash, sales have literally gone parabolic. At 70,000, they are above that MA by 75%!!! Recall my rule of 10% over the 200 day MA for the stock market as overbought. I am not sure if this longer moving average allows for my “10%” rule in housing. But there’s no arguing that housing sales are aggressively up from an historic perspective. Clearly, this is a red flag for anyone believing in mean-regression – of which I am one.
Meanwhile – Canada ranks amongst the highest in the world when it comes to household debt to GDP, at 113% as of December 2020 (rank 3rd), and household debt to income at 170% also as of December 2020 (rank 4th). With sales gong through the roof (pardon the pun) and a highly leveraged consumer buying those houses… the setup is there for some trouble.
Our leveraged consumer will be facing new economic pressures. Canada’s job numbers were out in early April and they looked robust. But that was before the latest lockdowns. Thankyou, Canadian Federal Government for unforgivably blowing it on vaccine distribution – as discussed last week. Here’s the official notice the CDC released on Wednesday of last week. The CDC (Center For Disease Control) now recommends travelers avoid Canada- yikes! All of this continues to place strain on the Canadian economy. How will this impact an already overleveraged consumer? How will this affect a real estate bubble in Canadian housing? As noted above, you don’t know when a bubble will implode. But…You can have a plan.
My take: I’m not so sure that now is the time to buy your next real estate investment in Canada. Perhaps its time to review an exit strategy on investment properties outside of residential and recreational usage.
And yet…there are always opportunities
Canadian Federal government bumbling aside, the USA and other countries continue to be on top of their vaccine distribution, and subsequent re-opening strategies. Travel by air in the USA, for example, is back to 80% of pre-COVID levels! Disney is seeing good flow in their parks. Back in my October 2020 blog I noted that the airline sector was setting up for a breakout. As these breakouts began to take shape, my February 15th blog identified certain names in that space that were looking good. We bought AAL, which I wrote about on that blog, in our Aggressive Platform. So far, it appears to be performing as anticipated.
Lesson: government action, or total lack of action, can influence your investments (positively or negatively). I’ve discussed monitoring government-influenced trades in past blogs like this one.
The US markets appear to be in a bubble
“In a bear market everyone loses. And the winner is the one who loses the least.”
—Richard Russell, Dow Theory Letters
Technical indicators on US market indices are stretched . For example, the S&P 500 is 15% over its 200 day/ 40 week SMA. This is a prime sign of overvaluation, and suggests a pullback is immanent. I do not like to see a market index to go much above 10% off of its 200 day moving average. Momentum indicators are overbought. Check out the angle of ascent for the SPX in the past 3 weeks. Can you say “parabolic”? For this reason, we at ValueTrend have slowly been raising cash and moving into defensive sectors. You’ve seen me talk about this in prior blogs.
Just because the market is overbought, does not necessarily indicate a bubble. So what constitutes bubble conditions?
I’d like to ask you to revisit one of my recent blogs for details on where we may be in the investment cycle. Click here to do so. If you will take the time to revisit that blog, you will see a list of conditions that might indicate we are indeed approaching a major top/ are in a bubble. I’ve reprinted the list below, but the blog noted more details that you might want to read. You might note that we currently meet each of these conditions. Crypto-coin anyone?
Conclusion
Like I said in the opening paragraph of this blog, just because the conditions are there for a bubble, doesn’t mean you will time it correctly and get out at the top. After all, the market can remain “wrong” longer than we might anticipate. For this reason, I continue to endorse the basic technical analysis approach. This approach does not get you out at the top, but it will get you out with less damage than a buy and hold strategy. Effectively, you want to watch a weekly chart for signs of a breakdown in trend. I wrote a blog way back in 2015 on how to employ this strategy, and encourage you to read it..here. You can also read my book Sideways for a detailed breakdown of a trading strategy.
If you will follow a basic trend analysis approach, along with following my monthly Bear-o-meter risk/reward readings, you will have an edge. Sector rotation strategies and good stock picking will allow you to stay invested in the right areas through the lower risk times, and broad market trend analysis will taper you out when risk rises. For our clients, that’s more important than chasing every last nickel in an overinflated market. If you feel you would like some guidance in your own portfolio to that end, contact us for a no-obligation discussion. There are three ways to get ahold of us, all listed here.
New video
I just posted the most recent video update– this video, entitled “Bulls make money, bears make money, but pigs get slaughtered” focuses on the relationship between dividend paying stocks and growth stocks. Are dividend aristocrats a safe haven when growth stocks decline? Click here to find out.
2 Comments
Hi Keith,
What is fascinating about the weekly chart top formations, is that they keep happening, even if the setup is very similar (RSI has to be very close or above 75 and the distance from recent candles must have a curved-up look to them). Usually, when a pattern is easily visible, it doesn’t work. In this case, it does! What’s even more puzzling is with this knowledge, I struggle to sell. Sure I sold about 10% of my ETFs, and some of my weaker positions, but why don’t I sell more when the odds of a pullback are so good? They are no? I suppose I don’t want to underperform the account people around me. If it keeps going, they will get very obnoxious on social media. That gets to me.
You probably already did look, but some ex-US international world ETFs have an even better pattern for their tops! If you take ZDM.CA for example, its weekly chart RSI never gets as high as the one of SPX. And the last 3 or 4 times it got to where it is now, it went down more than a few percents.
Of course, this time “feels” like it’ll be “different” because “this time” we had a pandemic and it’s soon over 😉
Thanks
Matt
Good point Matt–yes, we see most of the risk in the US-based NASDAQ stocks, tech, growth arena. So when we look at the x-USA indices we will have less downside (true though, all ships seem to rise and fall with the tide that is the US markets–but its the relative move I am focusing on). As such, my view is that if the NAZ falls (to keep it simple) 10%, you might see the SPX fall 8% as it is still pretty heavy in growth yet diversified enough not to follow the exact drawdown. Then, looking at countries with a resource focus like Canada, Australia, some of the EM’s, and even Japan and some European plays who are not necessarily correlated–you can still have a portfolio with lower downside potential should things get ugly in the US growth stock markets.
Then again, per my comment at the bottom of the blog–markets can correct by NOT going down, and simply moving sideways. Take a look at the AMZN correction which (as I predicted on this blog back then) peaked in August and has been correcting sideways as it brings its price in line with its 40-week/200 day SMA.