The gift of clairvoyance is one thing, but timing is quite another. This makes speculating on major market inflection points potentially very costly. However, when the ball has landed on black ten times in a row, very few of us can resist dismissing unconditional probability. So, which of the following extreme differences in price of one versus the other is the most likely to turn?
Candidate number one hit a record high of eight during the mayhem of the dot-com bubble, before falling more than 80%. Then AI came to the rescue. Now, the price of the Nasdaq is trading close to ten times higher than the Russell. Either small caps are dead, or bigger truly is better, but something may have to give again when we see these types of valuations.
Candidate number two brings together a trusted friend to many generations of traders, whilst real things have been exchanged for centuries. However, the difference between the price of the Dow Jones Index versus an index of commodities is now as wide as more than fifty years ago. Either there are infinite resources or those thirty stocks might not stay relatively overvalued forever, and there is some mean reversion.
Candidate number three is the Japanese Yen against the US dollar and here we may just keep going with the trend. The last time we hit an exchange rate of 160, we listened to new age pop music and had some very bad haircuts. However, as long as we can receive 5% interest in one, whilst only paying 1% for the other, we may have to look at levels last seen when the music was heavy and we seemingly never had our hair cut.
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