The entire market is waiting to see the looming crash in the US equity market. Lots of signs indicate the overbought condition, which is an indicator of possible recession.
One of the most watched indictors is P/E (price to earning) ratio for overall market. Current S&P 500 P/E ratio is 24.33, meanwhile the Mean is 15.66 and the Median is 14.66. It means that the stock prices are overvalued, and this is far beyond from the historic average levels.
The next very popular indicator is Tobin's Q. This is calculated by dividing the value of the stock market by total corporate net worth. If the ratio is greater than the ~0.7 mean, the market is in overbought condition. Today Tobin's Q is 1.038 which is another sign of overvaluation.
Billionaire Warren Buffett has often said that the ratio of market capitalization to gross domestic product (GDP) is a great measure of where valuations stand in the stock market. When the metric stands at greater than 100% of GDP, the Oracle (NYSE:NYSE:NYSE:ORCL) of Omaha believes that investors should be wary about holding common stocks, since they may be overdue for a correction. Now US Total Market Capitalization is 131.7% of GDP, which is another signal of potential stock crash.
On the other hand, there are a lot of events which can stand as the headline for the possible sell-off. The political disagreement between Republican party members and the president cast doubts whether the government would increase the debt ceiling or not, or if the tax reforms and tax cuts are realistic or not. There are also some foreign conflicts, which can be escalated into greater threats, such as US-North Korean sharpening relationship.
The easing of Fed balance sheet, which is expected to be announced in the Fed September meeting can hurt the stock market as well. The increase of safe havens in the market can easily urge the riskier asset owners to sell their shares to buy safe Treasuries.
Last but not least, it would be very useful to explore the behavior of the most successful investor of the world during this uncertain period. In May when the Berkshire Hathaway (NYSE:NYSE:NYSE:BRKa) had accumulated 90 billion in cash, he mentioned that he hates the cash, and he said that they were searching an opportunity to make a large-scale acquisition but they hadn't had anything on their radar then.
That meant that any huge purchase was coming in some months, meanwhile after the second quarter Berkshire Hathaway announced that it held about 100 billion dollars in cash.
Why is Berkshire Hathaway increasing Its cash stockpiles so rapidly?
Many analysts try to find the answer to this question, but probably we need to pay attention mostly on the fact that the increase is coincided with the predicted sell-off period in the stock market. So even the chairman of the greatest investing behemoth is cautious about the possible market slip.
Therefore, we need to answer just one question here: "Can we find any indicator that is more reliable that the reaction of the world's most successful investor?"