A Warren Buffett indicator flashes red

One may disagree with Buffett's politics but it's hard to challenge his stock picking over many years.  Mostly with its QE stuff, the FRS has inflated the price of stocks, since the real economy is moribund.  Time to lighten up on stocks!

The economy and the market
Buffett thinks the value of all stocks in the Wilshire 5000 TotalMarket Index should be worth less than the U.S. gross national product (GNP). And you can bet it's a key consideration he makes when looking at Berkshire Hathaway's (NYSE: BRK-B) portfolio. The GNP stood at $16.13 trillion at the end of 2012, according to the Bureau of Economic Analysis. Well, the Wilshire 5000 hit that mark on March 4, and has subsequently risen to $16.57 trillion. That difference may seem trivial, but history tells us the gap should be seen as a sell signal.

The Wilshire 5000 index was created in 1974 to capture the total value of the 5,000 largest companies on the various U.S. stock markets. (An aside: The steady attrition of publicly-listed companies during the past decade means there are now fewer than 5,000 companies in the index.)

Since the advent of the Wilshire 5000, it has exceeded the value of the U.S. GNP on only two occasions: 1998 and 2007. In each case, the market rose yet higher but eventually tumbled sharply. In fact, after the threshold was crossed in 1998, the market rose another 40%. Nonetheless, the market eventually stumbled so badly (as the Wilshire 5000 fell a hefty 40% from its March 2000 peak) that investors had a right to be nervous throughout the latter stages of that rally.