One Simple Chart to Gauge Real Estate Bubble Risk

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If you own a home, want to buy a home or live anywhere but under a rock, you’ve felt or heard about skyrocketing real estate prices.

Is there a real estate bubble, and what’s the risk of it bursting?

Here is one simply chart to gauge the real estate bubble risk … and incidentally, this short article also explains why the S&P 500 has been stuck around 4,200.

Ironically, COVID-19 accomplished what the Federal Reserve has tried for over a decade and failed: Inflation.

In May, more people than ever googled ‘inflation’ (orange graph, second chart). Often this kind of interest in a topic occurs towards the end of a trend.

For example, in the April 8, 2020 Profit Radar Report, I published google searches for ‘recession’ (chart below) to make the argument that the recession is over.

This contrarian take worked great for the recession, but does not work like that for inflation. Here’s why:

Most trends exhaust themselves when they become too popular (popular usually means there are no more buyers left, i.e. Bitcoin in April).

However, when inflation becomes too popular it can turn into a movement, a self-fulfilling prophecy, where consumers buy today because they think it will be more expensive tomorrow. That’s when inflation becomes a real problem (worse than supply shortages).

I don’t think we are there yet, but it must be carefully monitored (and I will provide specific inflation protection trades via the Profit Radar Report).

Anyway, the chart below provides a big picture look at the CPI, a popular but far from perfect inflation gauge.

I don’t want to be an alarmist here, but the CBOE equity put/call ratio closed at 0.36, the CBOE SKEW Index at 150.71, while the VIX is quite high and the actual daily range is only 0.21% (10-day SMA).

There are no precedents for this particular set of readings. If we relax the parameters, we get the signals shown below.

When there’s such a small sample size, I always ‘widen the net’ to ‘catch’ more precedents. Doing this revealed another common (at least in the past) outcome (discussed in last night’s Profit Radar Report).

From a charting point of view, the S&P 500 is trying to break above 4,250, which can be used as line in the sand to gauge risk vs reward.

Continued updates, out-of-the box analysis and forward performance based on historic precedents are available via the Continued updates and factual out-of-the box analysis are available via the Profit Radar Report. 

The Profit Radar Report comes with a 30-day money back guarantee, but fair warning: 90% of users stay on beyond 30 days.

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‘Black Swan’ Warning Indicator Soars to Record High

Have you even seen a black swan, I mean the actual bird? Probably not, because they are extremely rare.

That’s why the black swan has been used to describe extremely rare outlier stock market events. ‘Event’ is simply a nice way of saying crash or meltdown.

Black swan events are as rare as they are unpredictable, but the CBOE (the same outfit to create the VIX) crafted an index designed to measure the risk of a black swan event. This index is called the SKEW Index.

Here is the main difference between the VIX and SKEW: The VIX is based on implied volatility of S&P 500 at-the-money options while the SKEW is based on implied volatility of far out-of-the-money S&P 500 options.

Here is how the SKEW works: Readings of 100 mean that the risk of a black swan event is low. For every 5-point increase in the SKEW Index, the risk of a black swan event increases 1.4%.

On Friday, the SKEW Index closed at 155.31, which is the second highest reading since 1990 (as far back as SKEW data goes). A reading of 155 also means that the risk of a black swan event is 15.4% higher than usual.

With the theoretical stuff out of the way, let’s see if the SKEW Index actually works.

Does the SKEW work?

The chart below plots the S&P 500 agains the SKEW Index (going back to 1990). The SKEW moved above 150 only on 17 of 12,967 trading days (that’s 0.13% of the time). And none of those 17 days happened before 2015.

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The next chart makes it easier to identify those 17 times. Here are the key takeaways:

13 of the 16 prior signals (81%) saw any gains erased within the next 3 month

3 of the 16 prior signals (19%) saw significant further gains (2 of those gains were erased within 18 months)

Summary

The SKEW Index deserves credit for flashing warning signals prior to the 2016, 2018 and 2020 declines. It needs to be noted though that those signals were about 2 months too early. It will take a break below support to edge the potential black swan risk closer to reality.

Continuous updates are available via the Profit Radar Report.

Simon Maierhofer is the founder of iSPYETF and the publisher of the Profit Radar Report. Barron’s rated iSPYETF as a “trader with a good track record” (click here for Barron’s evaluation of the Profit Radar Report). The Profit Radar Report presents complex market analysis (S&P 500, Dow Jones, gold, silver, euro and bonds) in an easy format. Technical analysis, sentiment indicators, seasonal patterns and common sense are all wrapped up into two or more easy-to-read weekly updates. 

Follow Simon on Twitter @iSPYETF or sign up for the FREE iSPYETF e-Newsletter to get actionable ETF trade ideas delivered for free.

Bitcoin Update

While watching tennis on April 17, I caught a ‘too good to be true moment.’ What was it? A Coinbase commercial. The commercial included the price history and an actual projection (of course much higher) of Bitcoin. Frankly, I couldn’t even believe this was legal, because the commercial showed Bitcoin soaring from 58,000 to infinity.

I took a picture of my TV screen and commented on it in the Profit Radar Report (you can watch the full commercial here, the projection to infinity is shown at second 16).

Here is what I wrote about that in the April 25 Profit Radar Report:

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“What captured my attention is that the commercial actually projected the price of bitcoin going through the roof, which of course activated my contrarian antennae. The chart insert shows the price of Coinbase since going public (down 23.6%). 

Short-term, Bitcoin Futures are at support (around 47,500) with RSI-2 over-sold. This support may spark a bounce and a drop below support is needed for lower price targets.”

The chart below shows that Bitcoin first bounced from support but eventually that support failed and led to much lower prices. One down side target was the 161.8% Fibonacci extension at 30,574, which was reached on May 19.

As Bitcoin dove towards 30,000, it also fell more than 50% below its 50-day SMA, which doesn’t happen often. 

The orange lines below highlight other times Bitcoin traded more than 50% below its 50-day SMA. This kind of ‘oversoldness’ always led to a rally, although In 2018 that rally was brief.

In Summary, there was extreme Bitcoin euphoria around 60,000 and a possible ‘washout’ event around 30,000. It’s quite possible that price will trade in that range for a while as emotions recalibrate.

Continuous updates are available via the Profit Radar Report.

Simon Maierhofer is the founder of iSPYETF and the publisher of the Profit Radar Report. Barron’s rated iSPYETF as a “trader with a good track record” (click here for Barron’s evaluation of the Profit Radar Report). The Profit Radar Report presents complex market analysis (S&P 500, Dow Jones, gold, silver, euro and bonds) in an easy format. Technical analysis, sentiment indicators, seasonal patterns and common sense are all wrapped up into two or more easy-to-read weekly updates. 

Follow Simon on Twitter @iSPYETF or sign up for the FREE iSPYETF e-Newsletter to get actionable ETF trade ideas delivered for free.

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