Yesterday, the S&P/ASX 200 Index (ASX: XJO) hit its highest closing level since 11 March at 5,615.6 points after a healthy 2.16% gain for the day. Today, the ASX 200 is pushing even higher – up another 1.41% at the time of writing to 5,694.7 points.
The ASX blue chips that have the heaviest weighting in the ASX 200 are behind this surge. The big 4 ASX banks (with the exception of Commonwealth Bank of Australia (ASX: CBA)) were all up over 2% yesterday and another 1% this morning. Telstra Corporation Ltd (ASX: TLS), Woolworths Group Ltd (ASX: WOW) and Wesfarmers Ltd (ASX: WES) are powering ahead today as well.
Afterpay Ltd (ASX: APT) is also contributing, making a new all-time high this morning of over $50 per share.
So what's next for the ASX 200? Onwards and upwards?
On the contrary, here are 3 reasons I think the ASX 200 is getting into overvalued territory at these levels
1) US markets are wagging the ASX 200 dog
'If America sneezes, the world catches a cold' is how the old saying goes. As much as we would like to think otherwise, what happens in the United States pretty much dictates what happens on the ASX 200. And over in the US, the Federal Reserve is pumping a mind-boggling amount of cash into the financial system.
Here's something to ponder: The US S&P 500 Index is only down 9.28% year to date. Really? Is the coronavirus pandemic and accompanying economic destruction only worth 9.28% in 2020?
Something strange is happening to the US markets (in my very humble opinion) and it has a lot to do with the massive Fed interventions.
This artificial inflation of the share market over there is spilling into the ASX in my view.
2) The markets are dislocating from reality
As a consequence of interest rates being a cut above zero, I think the markets have become distorted. There are no other options left for investors these days. Bonds, term deposits and other debt instruments have lost their potency as investments, which means a large section of the investing community is being pushed into ASX 200 shares.
This strong buying pressure is drawing attention away from the fact that corporate earnings are going to be hit hard in 2020 and possibly further into the future. We have entire businesses like Qantas Airways Limited (ASX: QAN) and Webjet Limited (ASX: WEB) in the deep freezer, commercially speaking.
Is this reflected in the current market? Not in my opinion. On the contrary, ASX travel shares like Qantas and Webjet are among today's biggest gainers. Go figure.
3) FOMO has taken over the ASX 200
Investing greats like Warren Buffett and Benjamin Graham have said that the market is driven by 2 emotions: fear and greed. We saw a lot of fear in the ASX 200 back in March, and I think the current rally is being emotionally driven by greed. Once a market starts putting runs on the board, it attracts investors who might have 'gone to cash' and are waiting to jump back in on fear of missing out (FOMO). This effect then snowballs as markets are pushed even higher.
It doesn't matter what fundamentals actually underpin the markets in this type of situation, it slowly becomes a game of musical chairs. It can go on for a while, but eventually, the music stops. It's hard to know whether this is happening, but it sure is starting to feel like it for this writer.
Foolish takeaway
I'm not trying to elicit panic here and I enjoy watching the value of my ASX 200 shares rise as much as the next investor. However, I like to 'hope for the best, but prepare for the worst' with my investing, and I see a lot of reasons why this market might be becoming overvalued.
The solution? Well, I'm not one to try and time the markets, but I am getting as much cash together as possible. That way, I always have one foot in both camps.
