Another Bearish Signal! "Buffett Indicator" Skyrockets, Market Frenzy Surpasses Dot-Com Bubble Era

Retail investors are undoubtedly the biggest winners in the second and third quarters of this year, with not only the US and Taiwan stock markets continuing to rise, but Bitcoin also hitting a new high of $12,468 on the 17th. Despite many financial experts warning about the risks, the fundamental indicator "Buffett Indicator" has been hitting historical highs this year, indicating that the market heat has surpassed the levels of the dot-com bubble era.

What is the "Buffett Indicator"?

The "Buffett Indicator," or Warren Buffett Indicator, originated from an article in Fortune in 2001. Buffett pointed out that dividing the "total market capitalization of stocks" by the "gross domestic product" could be used to evaluate whether the stock market is overvalued or undervalued.

Typically, a reasonable range should be between 75% and 90%, with anything above 120% indicating an overvalued stock market.

However, Buffett mentioned the limitations of this indicator back in 2001. According to data from MacroMicro, except for a brief dip to 100% in January 2019 and March this year, the indicator has been soaring since surpassing 100% in mid-2013, currently nearing 180%.

Warnings of a Possible Market Crash

Despite the "Buffett Indicator" signaling extreme overvaluation in the stock market, and Buffett's absence in this year's frenzy market confusing investors, stock prices continue to hit new highs. Billionaire MARK CUBAN expressed in an interview in June:

If you’re a day trader, you should be making a killing right now, but in reality, this is no different than the day traders of the late 1990s. In a bull market, everyone’s a genius, just like during the dot-com bubble.

Former Goldman Sachs analyst Joseph Mauro revealed the market's frenzy with a tweet:

My son just told me he can only play Fortnite at night because half his team is now trading stocks. He’s 10. True story.

Where is Bitcoin Heading?

Although Bitcoin is often referred to as digital gold, objectively, Bitcoin has not exhibited its hedging properties. According to data platform Skew, Bitcoin has recently shown a surge similar to gold, but their correlation over the past year remains at only 12.9%.

Interestingly, Bitcoin's trend is more closely related to the S&P 500 index, with a correlation of 42.3% over the past year.

Previously reported, the Bitcoin NVT valuation model (Network Value to Transactions Ratio) proposed by crypto analyst Willy Woo indicates that its derivative indicator, "NVT Signal," is approaching a sell signal similar to the price peak in December 2017.

While Bitcoin enthusiasts attribute this year's surge to the weakening of fiat currencies due to excessive money printing by various countries, from a risk perspective, Bitcoin still exhibits a positive correlation with traditional financial markets, and the fear index fluctuates between "greed" and "extreme greed", a point of concern for investors.