Sector Bubble Watch Part II: Stock Watch + Other Risk Assets By, D.R. Barton, Jr.

Earlier this month, we talked about recent and potential future financial bubbles. There has been, what I’ve called, a “money storm” in the U.S. (and similarly in many other countries) coming from continued Federal Reserve monetary stimulus and from fiscal stimulus delivered by congress.

Here’s a picture of the ongoing massive expansion of the Fed’s monetary injection:

Note that the current amount of Fed Total Assets is $8.24 trillion—an incredible 9x times bigger than September 2008.

We know that congress has provided three rounds of stimulus to combat the economic downturn of COVID.

The net result of these monetary injections is that savings accounts in the U.S. are bursting at the seams:

Much of that money is making its way into the stock market, with the S&P making 40+ new all-time highs this year.

Because of the previous two charts (and other reasons we’ll discuss in Part III), I don’t believe the S&P 500 has yet hit bubble status.

But I will end this short note with the first “yellow flag” I’ve seen in market breadth.

As a refresher, cumulative breadth is calculated this way: Each day, the NYSE reports an “advance-decline” number, which is simply the number of stocks that closed higher today than yesterday, minus the number of stocks that closed lower.

This number is also called the market “breadth.” If you add all of those sequential individual breadth or advance-decline numbers together, you get a cumulative number. We’ve looked at this chart many times with the simple premise that when the market is making new highs, there is little danger of a massive selloff if the cumulative advance-decline line is also making new highs.

However, with recent run-ups in the mega-tech companies and just a few others, current new highs have not seen support from the broader market, as you can see here:

I have to reiterate that this is a “yellow flag,” not a red one! I’ll talk more in our next article about the nature of bubbles and whether or not the U.S. stock markets are meeting those historical criteria.

Until then, here’s a request: Let me know (via the email below) what current sector or asset bubbles have your attention, and which bubble will be the next to pop.

I always enjoy hearing your thoughts and comments. Send them to me using drbarton “at”

Great Trading and God bless you,

D. R.

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