“You shouldn’t own common stocks if a 50% decrease in their value in a short period of time would cause you acute distress.” – Warren Buffett
Wise words very much worth heeding, particularly for fans of hyper-overvalued “meme stocks” like ARKK or Tesla, or for those who bought the AI mania at the top (Nvidia).
The share price of Berkshire Hathaway has fallen 50% multiple times.
I’ve written before of using market proxies in my timing tools. Arguably the most “value stock” ever is Berkshire. There hasn’t been a first time in its long storied history during which technical measures I utilize were flashing a warning - like now - that this iconic widely-owned and beloved stock, and markets overall, didn’t begin a drop to far lower levels at some point over the following year.
Past patterns suggest things won’t get really bad until rate inversions reverse, after which there’s a recession as central banks chase real rates lower. That typically coincides with stocks crashing, hitting bottom around the same time a recession is eventually retroactively “officially” declared as real rates recover.
WSJ headline a harbinger: Boomers Got Hooked On Stocks, Now They Can’t Let Go. Nearly 2/3 over age 65 have money in stocks.
All manias end the same, and it’s not different this time.
Below is a chart of the Dow / gold ratio, showing large caps peaked vs. gold 5 years ago within the typical range, while the Dow’s all-time high was January 2023, and it’s a very long way down if history is any indication.
The grey areas are periods declared officially as recessions:
When might the next recession occur? Well, we’re already in it. “Officially” however, a major recession typically coincides with yield inversions unwinding.
Recently the 10-2 year treasury yield spread was inverted to an all-time record degree. Though it could become inverted to an even greater historic extreme, it appears that a double-bottom is in evidence and the unwinding has begun:
Here’s an updated version of that chart, showing the double-bottom (in red) held while the established level of support and resistance for 2023 (blue line) has been breached:
According to my scoring system the top-4 Berkshire holdings by size, which account for a whopping 73% of its holdings - Apple (AAPL), Bank Of America (BAC), American Express (AXP), and KO (Coca Cola) - all turned bearish earlier this month.
My scoring for Berkshire itself is on the cusp of turning bearish any day now.
As market barometers, these stocks turning bearish at this stage of the cycle, and after massive short-term run-ups likely to be at least partially retraced, is beyond worrisome.
It’s often said “they don’t ring a bell at the market top”.
I hear a bell, loud and clear.
Until it stops ringing, ask not for whom the bell tolls; it tolls for the bulls.
I’m doubling my 1/4 position in TSLQ, a Tesla short ETF, to a 1/2 position.
Thanks for your insights and analysis. And the big “heads up.