Wednesday, August 5, 2015

Stable stocks as a bubble indicator

I have a model portfolio consisting of old large-cap low-volatility US stocks, mostly Utility and Consumer Staples sectors, 22 names so far. I call it a super-stable portfolio.

Even if I'm not planning to trade this particular portfolio - yet - I find it useful as a market indicator. I see those stable stocks as a backbone of the stock market, so the difference between the broad market index and this portfolio should mean something.

Let's take a look at this difference in volatility-normalized scale, the super-stable portfolio vs. SPY, total returns:



It is remarkable how far the broad market ran away from its backbone during 1995-2000 market boom. The 2000-2002 bear market has not completely corrected this mispricing, only after 2008 the difference has returned to the state where it was in 1994.

And I can see no bubble since then. At present, the broad market stays pretty close to its stable backbone. If you expect a super crash anytime soon - sorry, no good news for you.

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