ASX Trader: Warren Buffett’s go-to market signal showing signs of monumental market meltdown

Billionaire Warren Buffett’s go-to market signal has hit the most extreme levels in history, flashing bright red a market meltdown is looming. It’s telling Aussies to look local, writes ASX Trader.

Billionaire Warren Buffett’s go-to market signal, the same one that flagged the dot-com bubble, the 1970s lost decade and the 2022 tech wipeout has hit its most extreme level ever in recorded history - and it’s flashing bright red for the U.S. stock market.

And every time this signal has hit these kind of high levels, the market hasn’t just dipped ... it’s plunged.

But here’s the surprising twist: Australia isn’t caught in the crosshairs.

In fact, our market looks remarkably well-positioned, possibly one of the safest places to be as global risk rises.

Here’s why Australia could outperform in the years ahead and why history is firmly on our side.

What is the Buffett Indicator?

Buffett has called it “the best single measure of where valuations stand at any given moment.”

It compares the total US market cap to GDP and has an uncanny record of foreshadowing major market tops.

If the total US stock market is worth much more than the entire US economy, that’s a warning sign.

If it’s closer to equal, the market is likely fairly valued.

Warren Buffett’s go-to market signal is flagging trouble in the US.

When the Buffett Indicator hits extremes, the S&P 500 pays the price

Right now, the Buffett Indicator is sitting at 209 per cent - its highest level in recorded history and more than two standard deviations above its long-term average.

In plain terms, this is the kind of extreme that has never ended well.

Every time the Buffett Indicator has reached these levels, the S&P 500 has followed with either a major crash or a lost decade. Let’s look at the track record:

- 1970s: The Buffett Indicator breached 100 per cent just as inflation began to surge.

The S&P 500 delivered no price gains for a full decade and lost –48 per cent in real terms when adjusted for inflation.

- 2000: The indicator spiked to 150 per cent during the peak of the dot-com bubble.

Within two years, the S&P 500 collapsed by almost 50 per cent and didn’t recover for over a decade.

- 2021: The indicator topped 210 per cent, hitting an all-time high. In 2022, as interest rates rose sharply, the S&P 500 dropped –27 per cent.

Each of these events had one thing in common:

The Buffett Indicator had entered the red zone (as marked) more than two standard deviations above its average and the fallout was brutal.

The Buffett red zones.

“This time is different” are the four most dangerous words in investing, Warren Buffett once said.

Yet once again, investors are saying it: that tech, AI, and liquidity will defy gravity.

But if history is any guide, the higher the Buffett Indicator climbs, the harder the fall that tends to follow.

Australia: A Buffett-Style market hiding in plain sight

While many global markets are flashing warning signs, Australia remains one of the few fundamentally grounded and fairly priced opportunities on the table today.

The Buffett Indicator for the ASX 200 currently sits at around 100 per cent of GDP - which is right in the fair value zone. No red flags. No bubbles. Just sensible pricing, supported by real earnings.

Warren Buffett was quoted as saying “it’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price”.

And that’s exactly what Australia offers today: world-class, dividend-paying businesses in essential sectors without the hype.

The value of the US stock market compared to Australia.

A historic disconnect: The XJO/NDX Ratio is flashing opportunity

Another major signal backing Australia right now?

The XJO/NDX ratio - a simple chart that compares the Australian ASX 200 to the US Nasdaq 100.

That ratio has just dropped to its lowest level since the year 2000, right before the dot-com bubble burst.

And what happened next?

• The Nasdaq plunged 78 per cent

• The ASX 200 fell just 22 per cent

• Then, from 2003 to 2007, the ASX 200 surged +139 per cent, outpacing the Nasdaq’s +101 per cent recovery.

“You don’t have to swing at every pitch. Wait for the fat one.,” Buffett has said.

Right now, Australian equities might just be that “fat pitch” Buffett talks about - undervalued, overlooked, and set up for strong returns.

The XJO/S&P500 Ratio

Built for stability, positioned for strength

The ASX 200 is structured very differently from the hype-driven, tech-heavy US markets.

It’s rooted in real-world sectors that have pricing power, strong balance sheets, and global relevance:

• Banks: High-margin, systemically essential, and heavily regulated

• Resources: Global exposure to lithium, iron ore, copper, gold, and more

• Healthcare: Biotechnology, aged care, and medtech leaders

• Energy: Producing and exporting into a structurally undersupplied world

• Infrastructure and Property: Backed by hard assets and income streams

These sectors have proven they can withstand volatility and thrive in rising-rate, inflationary environments which is something tech-heavy markets often struggle with.

And with only around 3 per cent of the ASX 200 in technology, Australia is not tethered to the boom-bust cycles of Silicon Valley sentiment.

When tech crashed, Australia held its ground

History shows that when US tech markets unravelled, Australia stood firm.

During the dot-com collapse from 2000 to 2003, the Nasdaq plunged 78 per cent, wiping out years of gains.

In contrast, the ASX 200 dipped just 22 per cent - a relatively mild correction, as highlighted in the red boxes.

But the real story came after.

From 2003 to 2007, while the Nasdaq was still finding its feet, the ASX 200 surged to new highs, powering ahead with strength - as seen in the green boxes.

And that’s before accounting for dividends and franking credits, which significantly boosted total returns for long-term Australian investors.

When the bubble burst and hype collapsed, value came out on top - and Australia quietly won.

Today, history may be lining up to do the same.

The ASX 200 v the Nasdaq

You only fear a crash if you’re holding the bubble

With the Buffett Indicator confirming fair value, the XJO/NDX ratio signalling historic undervaluation, and a sector mix built for real-world resilience, Australia stands as one of the few markets offering quality at a reasonable price.

“Price is what you pay. Value is what you get,” said Buffett.

Buffett built his fortune buying companies like this and not on hype, but on value, discipline, and patience.

And here’s the truth: you only fear a crash if you’re caught holding an overinflated balloon. For long-term investors focused on fundamentals, there’s no need to panic because there’s still opportunity out there, if you know where to look.

When one part of the market is peaking, something else is bottoming.

Right now, Australia might be that overlooked value play quietly preparing for its next leg up, not with noise, but with earnings, dividends, and durable strength.

This isn’t a time for fear. It’s a time for focus.

What should investors do?

1. Don’t panic about a US crash. It’s not your market.

2. Watch the XJO/NDX ratio. Historically, this marks major turning points in leadership.

3. Position for the next decade, not the last. Tech is no longer the only game in town. Don’t chase yesterday’s gains.

Markets go through cycles.

The last 10 years belonged to Silicon Valley.

But in a world of higher rates, real assets, and fiscal resilience, the next 10 could belong to sectors like banks, commodities, and infrastructure. We’ve been here before.

And the last time this happened, Australia didn’t just survive, we led.

Originally published as ASX Trader: Warren Buffett’s go-to market signal showing signs of monumental market meltdown