Warren Buffet Favorite Stock Market Indicator And China

Chinese stock market crashed. Then the government intervened in an attempt to stabilize the stock market. It put restrictions on margin trading and short selling. Things works for a few days. The stock market is crashing again. Looking at the daily chart of the Shanghai Stock Exchange Composite (Shanghai Stock Exchange: .SSEC), the broadest benchmark for the Chinese stock market, Collins knew the market was troubled.

The Shanghai Composite was absolutely creamed from mid-June to mid-July, losing about one-third of its value in less than a month. So, while the market did rally for the past couple of weeks, Collins said that was nothing more than a bearish consolidation pattern where it was marking time before its next leg down.

But what does Warren Buffet thinks about the Chinese stock market. The famous billionaire has long been bullish on Chinese stocks. About a decade-and-a-half ago, Buffett divulged what he said was his favorite metric for determining whether the stock market was overvalued or undervalued… Buffett said he likes to compare the total value of the stock market to the output of the economy, or GDP. It’s like a price-to-earnings ratio but for the economy instead of just one stock. Buffett said he likes to buy when stocks are trading at 70%-to-80% of economic output. Anything over 133% begins to look expensive.

If you apply this Warren Buffet metric to the Chinese stock market. It gives a positive value meaning the stock market is not a bubble.