For thousands of years, humans have tried to interpret signs in an attempt to know what the future holds. Star gazing, palm reading, tarot cards, and tea leaves are just some of the methods used.
Such efforts are considered superstitious by many investors today. However, some investors believe that certain signals can accurately predict the performance of stocks. There are two major indicators emerging now that could signal a major move in the stock market.
“Fear Index” rises
Franklin D. Roosevelt once said, “The only thing we have to fear is fear itself.” If so, investors may have something to fear. Why? The stock market’s “fear index” is rising.
I am referring to CBOE Volatility Index (Volatility Indicators: ^VIX)which is also widely known by its ticker symbol VIX. Over the past month, the VIX has jumped more than 30%.
This indicator measures expectations of volatility in Standard & Poor’s 500 Over the next 30 days. Calculated using S&P 500 Index prices. OptionsThe higher the prices of these options, the greater the volatility is expected to be.
To a large extent, the stock market is driven by the mindset of investors. When investors feel confident, they are more likely to buy stocks. This creates buying pressure that pushes stock prices up. But when investors feel fear, they are more likely to stay on the sidelines. This paves the way for stock prices to fall.
Buffett Index Nears All-Time High
More than two decades ago, Warren Buffett described in luck In 1991, Buffett described what he considered “the single best measure of where valuations stand at any given moment.” He was talking about the ratio of the total value of the U.S. stock market to the country’s gross domestic product. This ratio became known as the Buffett Index.
When Buffett made this statement in December 2001, the stock market was in the midst of a massive sell-off as the dot-com bubble burst. The legendary investor argued that the unprecedented rise in the ratio of total stock market capitalization to GDP two years earlier “should have been a very strong warning sign.”
“If you get close to 200 percent — as it did in 1999 and part of 2000 — you’re playing with fire,” Buffett said in his Fortune article, noting that the ratio recently reached 133 percent.
Now let’s move to the present. The Buffett Index is about 194%. The only time it has gone up was in November 2021. The S&P 500 soon began to fall sharply, eventually falling more than 19%.
Is the stock market going to go down big in the future?
With two indicators flashing ominously, are we seeing a big drop in the stock market? Maybe, but not necessarily. There is no perfect stock market indicator.
For example, the Chicago Board of Trade volatility index was much higher in early 2023 than it is now, and the S&P 500 ended the year up 24%.
As for the Buffett Index, even as the ratio hit an all-time high in early 2018, the S&P 500 continued to rise. It’s also important to note that the ratio only uses U.S. GDP, but many U.S. companies generate much of their revenue in other countries. Globalization has made the Buffett Index less useful than it once was.
What should investors do? I think they should only buy stocks that have attractive valuations relative to their growth prospects. I also think it’s a good idea to keep some cash on hand to use in case the stock market falls. However, I would recommend these two things even if the “fear index” is falling and the Buffett index is much lower.
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Keith Spits He has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has Disclosure Policy.
Two Key Indicators Are Emerging That Could Signal a Big Move in the Stock Market Originally posted by The Motley Fool