By Michael Snyder, on March 12th, 2014
I was recently discussing the market, current sentiment and other investing related issues with a money manager friend of mine in California. (Normally, I would include a credit for the following work but since he works for a major firm he asked me not to identify him directly.) However, in one of our many email exchanges he sent me the following note detailing the 10 typical warning signs of stock market exuberance.
(1) Expected strong OR acceleration of GDP and EPS (40% of 2013's EPS increase occurred in the 4th quarter)
(2) Large number of IPOs of unprofitable AND speculative companies
(3) Parabolic move up in stock prices of hot industries (not just individual stocks)
(4) High valuations (many metrics are at near-record highs, a few at record highs)
(5) Fantastic high valuation of some large mergers (e.g., Facebook & WhatsApp)
Margin debt/gdp (March 2000: 2.7%, July 2007: 2.6%, Jan 2014: 2.6%)
Margin debt/market cap (March 2000: 1.8%, July 2007: 2.3%, Jan 2014: 2.0%)
(7) Household direct holdings of equities as % of total financial assets at 24%, second-highest level (data back to 1953, highest was 1998-2000)
(8) Highly bullish sentiment (down slightly from year-end peaks; still high or near record high, depending on the source)
(9) Unusually high ratio of selling to buying by corporate senior managers (the buy/sell ratio of senior corporate officers is now at the record post-1990 lows seen in Summer 2007 and Spring 2011)
(10) Stock prices rise following speculative press releases (e.g., Tesla will dominate battery business after they get partner who knows how to build batteries and they build a big factory. This also assumes that NO ONE else will enter into that business such as GM, Ford or GE.)
All are true today, and it is the third time in the last 15 years these factors have occurred simultaneously which is the most remarkable aspect of the situation.