Sornette Bubble in the Buffet Indicator

The Buffet Indicator is in Part 3 of a Classic Sornette Bubble

The Buffet Indicator is in Part 3 of a Classic Sornette Bubble

Doug Short has been keeping up a chart of the Buffet Indicator (market cap to GDP).  He points out that it shows that the market is valued at two to three standard deviations above the valuation mean.

What I see on the chart is a classic three-part Sornette bubble, which suggests that valuations have a lot further to go.

Part 1 of this Sornette bubble ended with a classic lumpy top in the 60s through early 70s.  Part II of the Sornette bubble topped in 2000 with the dot.com bubble.  Part II always completes with a classic vertical bubble melt-up.

You don’t always get a third part, but in this case there’s a classic Sornette bubble part 3 on the chart.  When there’s a Part 3, it’s always at least as big of a move as the move from the low to the high of Part 2, and usually bigger.  Part 3 also tends to take a lot less time than part 2–typically, it goes from low to peak in about 1/3 the time it takes for Part 2 to  move from low to peak.

This suggests the vertical move in the Buffet Indicator will be accelerating from here and has probably traveled only about halfway to its bubble target.

The increase in the indicator doesn’t have to come entirely from rising stock prices.  It could come from a crashing GDP as well.

Gold Price Channel Decision Point

Gold is Trying to Confirm Gray Price Channel

Gold is Trying to Confirm Gray Price Channel

Gold has formed a megaphone (pink on chart) at the top of a potential price channel (gray). Usually gold would retrace to the pink megaphone VWAP at this point, which is at the gray price channel top, before breaking out downwards from the megaphone for a trip to the bottom of the gray channel.

If this scenario plays out, the gray price channel bottom would be a critical decision point for gold. This is the point where the move will either accelerate into a steeper price channel meltdown, usually after a partial retrace into the channel (green scenario), or reverse to break out the channel top and move sideways for a while (purple scenario).

Gold has a long-term target at 1000, so there are good odds of a breakout into a melt-down channel.

10-Year T-Note Price Channel Melt-Up Set-Up

The 10-Year T-Note's Coming to the Critical Decision Point in a New Price Channel (Navy Blue on Chart)

The 10-Year T-Note’s Coming to the Critical Decision Point in a New Price Channel (Navy Blue on Chart)

The 10-year T-Note has confirmed a new price channel (navy blue on chart above) within a megaphone (pink on chart below).  The price is coming to the critical decision point within that price channel for a breakout upwards into a melt-up channel vs. a breakout downwards into a sideways move.

10-Year T-Note Megaphone Scenarios

10-Year T-Note Megaphone Scenarios

Because the pink megaphone is now legal for an upward breakout (purple scenario), there are excellent odds of seeing a melt-up. The set-up is to go long on an upwards breakout from the navy blue price channel.

The theoretical target of an upward breakout from the navy blue channel would be the top of the bright blue megaphone.  However, usually in a megaphone of this size, the price would fall a bit short (while passing the October 15th high).

Oil has Retraced to Very Long-Term Megaphone VWAP – Either Bottoms Here or Kaboom

Oil has Retraced to VWAP of 9-Year+ Megaphone

Oil has Retraced to VWAP of 9-Year+ Megaphone

Oil has retraced roughly to VWAP of a 9-year megaphone (bright blue on chart). The original VWAP is closer to 60—it would usually go all the way to there, but typically it would be in the context of forming a bottom, starting here.

What would usually happen is that oil would now form an interior megaphone across the VWAP area.  As you see the interior megaphone start to take shape with small waves, you can start playing the bigger waves.

If oil should somehow get through this VWAP area without a fight, the chart calls for $10ish. That’s very hard to believe, but would certainly be interesting.