To get an indication for where the markets are headed, it can help to look at what the riskier parts of the investment universe are doing. Enter the “froth index” and it comprises all those asset classes, stocks, and investments that you wouldn’t want to be holding when things hit the fan. So, what are the tea leaves telling us now?
Small cap stocks are still trading 20% from their peak even though the S&P500 has hit an all-time high. Usually, they lead the way in new bull markets, so the continued underperformance is a bit disconcerting. The regional banking index is also still nursing losses of 36% and going nowhere fast. The retail sector is down 25% from recent highs, housing is off by more, and lumber is still down 22% from March.
How about technology stocks, which lest we forget, lost 80% when the dot com bubble burst? Here we have a case of the have and have-nots. Apple and Amazon seem to be doing just fine, but those companies that are reliant on cheap financing to grow continue to get slaughtered. The ARK innovation ETF, the poster child for all things frothy, is still trading down 71% from its highs.
In fact, outside of the Mega-caps, everything else looks fairly dead as far as people’s risk appetite is concerned. With one notable exception, and it happens to come from the riskiest part of the market. The value of all crypto currencies not named Bitcoin or Ethereum, has increased by 68% in the last year. All hail Dogecoin!