This Day On The Street
Continue to site
ADVERTISEMENT
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

Warren Buffett's Favorite Indicator Shows Equities May Be Stretched

The indicator alone does not signal that markets are ripe for a crash, rather that equity market valuations relative to economic output are as rich as they have ever been. Other factors in the economy, however, are showing signs that equity markets may be reaching a point of correction.

There has been divergence developing lately between SPDR S&P 500, SPDR S&P Homebuilders (XHB) and iShares Russell 2000 Index (IWM). As S&P 500 has continued to push towards new highs, both homebuilders and small-cap equities have lagged behind, while forming bearish technical patterns on their long-term charts.

If weakness persists in both small-cap equities and homebuilders, then sentiment could be adversely affected. Similarly, if the Fed chooses to raise interest rates in the first half of 2015, this could create a catalyst for both indexes to move sharply lower, bringing global equities down with them.

 XHB Chart

XHB data by YCharts

Read More: Twitter Soars on Earnings Blowout: Tech Winners & Losers

At the time of publication, the author held no positions in any of the stocks mentioned, although positions may change at any time.

Follow @macroinsights

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

2 of 2

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
Submit an article to us!
SYM TRADE IT LAST %CHG
SPY $208.14 -0.36%
IWM $121.31 0.38%
AAPL $125.08 -0.57%
FB $78.28 0.93%
GOOG $524.46 -1.20%

Markets

DOW 17,841.98 -86.22 -0.48%
S&P 500 2,080.15 -9.31 -0.45%
NASDAQ 4,919.6440 -19.6830 -0.40%

Partners Compare Online Brokers

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs