Is Too Much Euphoria a Bad Omen?

Record valuations. Euphoric investors. What could go wrong? Our October Elliott Wave Theorist offers these insights:

TopDown Charts publishes an indicator combining three measures of sentiment: (1) sentiment readings from investor surveys, (2) the forward PE ratio, i.e. stock prices vs. the consensus for earnings over the next 12 months, which is a reflection of the degree of confidence in future earnings growth, and (3) the VIX, which measures whether stock price changes reflect panic or complacency. The latest readings have set an all-time record, as you can see in the chart below.

Speaking of all-time records, Warren Buffett’s favorite indicator — the price of the FT Wilshire 5000 stock index as a percentage of annual Gross Domestic Product — just reached a record high of 200%, as shown in the chart below. No wonder Berkshire Hathaway has been raising cash.

One could make a case that the bears are stupid, and one could make a case that the bulls are stupid. Even if both conclusions are potentially correct, one must concede that bears are stupid and safe, whereas bulls are stupid and exposed.

Should YOU be raising cash like Berkshire? Get instant access to our analysis via a special combo price for both our Elliott Wave Theorist and Elliott Wave Financial Forecast (new November issue publishes Nov. 1). Follow this link to learn more.

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