The Stock Market Bubble —and How to Play It
Every stock market bubble begins with a story, and make no mistake—this is a stock market bubble.
The story began easily enough, if not with “once upon a time.” A virus forced the country to shut down and accelerated the gains in a select few technology stocks that are uniquely capable of thriving with everyone stuck at home. A central bank took quick action to prevent financial markets from seizing up, pushing interest rates about as low as they could go. That helped lift the stocks of companies that are growing, including chiefly the aforementioned tech stocks, even if some have no profits. These stocks were among the first to rally once the stock market bottomed in March.
Now, get ready for the plot twist: Good investment ideas can stop being good ideas if the story goes on for too long. The tech trade—including tech companies that aren’t officially labeled as such—went too far before correcting suddenly in the past two weeks.
After gaining 75.7% from its March 23 low through Sept. 2, the tech-led Nasdaq Composite fell 10%, to 10,847.69, over three trading days, its swiftest correction on record.
But one correction doesn’t mean that the story is over, or that the bubble is ready to burst. To the contrary, the forces that drove stocks such as Apple (ticker: AAPL) and Amazon.com (AMZN) to astonishing heights remain firmly in place. They include the companies’ continued growth, the Federal Reserve’s determination to do whatever it takes to keep the economy afloat, retail investors’ newfound interest in trading, and maybe even a bit of fiscal largess. Stocks will remain volatile, but the tech bubble will continue to inflate.
For an investment bubble to occur, there has to be a widespread belief that a new paradigm has taken hold requiring an adjustment in valuations far beyond what previous fundamentals would imply. This belief needs to engage the imagination of investors beyond Wall Street, and there must be plenty of capital available to chase stock prices higher. The Covid-19 crisis has unlocked all three prerequisites.
Is everything “priced in?” Investors have gone “all in” with a disregard for caution. But with markets extended and overvalued what should investors do now?
As discussed in this past weekend’s newsletter, investors got even more speculative during the recent correction, which is the opposite of what you would expect. But if markets anticipate “good news,” then are there any “surprises” left?
In other words, if markets have priced in perfection, then there is not a lot of room for “disappointment.” Such was a point I made this morning on Twitter:
As we have discussed previously, “market momentum” is a hard thing to kill. Such is particularly the case when the “Fear Of Missing Out” overrides logic. In this past weekend’s missive, we laid out the case for a “sellable rally.” To wit:
“You can see the failure of the market at the 20-dma and the support at the 50-dma. What is essential are the upper and lower indicators.
- Both of the upper indicators are currently registering short-term oversold conditions, suggestive of at least a reflexive bounce next week.
- Conversely, both of the lower “sell signals” have been triggered, and as noted in the video, it suggests there is additional selling pressure on stocks currently.”
Just days after a new partnership with General Motors Company sent Nikola Corporation shares soaring, Nikola short seller Hindenberg Research released a new report accusing the company of being “an intricate fraud built on dozens of lies.”
Hindenburg allegedly spoke to a former Nikola employee who said the company’s YouTube video entitled “Nikola One in Motion” was produced to appear to show a Nikola truck driving down a desert road, but the truck in the video was actually towed to the top of a hill and released. The video allegedly showed the truck cruising once it had accelerated from rolling down the hill.
“Although the company didn’t specifically say the truck was moving under its own power, it was the clear implication,” Hindenburg wrote in the report….CLICK for complete article
What’s going on with the U.S. stock market’s amazing performance in these pandemic times?
Quite a lot, actually. In the second quarter, the economy contracted by an annualized rate of about 33 percent, while gasoline prices rose more than 12 percent, and manufacturing increased by more than 7 percent.
And yet, from March through August, the market has outpaced the economy dramatically. Some experts explain it by asserting that the market is disconnected from the economy; others say the opposite.
Even experts at the highest level don’t seem to have the whole picture.
Performance is less of a riddle than many think, when viewed from a more strategic perspective Full Story
The S&P 500 is an exclusive club of the 500 biggest companies by market cap on the NYSE or Nasdaq, and the inclusion Friday of three new companies to replace three that are outgoing was a big deal–particularly because EV darling Tesla (NASDAQ:TSLA) wasn’t among those chosen for onboarding.
Because Tesla was given the cold S&P 500 shoulder, its stock is taking a beating.
The market-defying stock is down from $502.8 on September 1st to $354.67 at the time of writing on September 8th. That’s a major culling on a snub that no one expected from the S&P 500 club.
The club booted H&R Block, Kohl’s and Coty, and replaced them with Etsy, Teradyne and Catalent.
Investors will be forgiven for their confusion.
They will also be forgiven for not having ever heard of Teradyne, an industrial automation and robotics company, and Catalent, a pharmaceuticals developer.
And the surprise that a crafting marketplace such as ETSY has been admitted into the club over the Tesla giant is also easy to understand.
For anyone waiting for an explanation, there won’t be one. The S&P 500 doesn’t explain itself.
That said, the club has to decide whether it’s going to go along with market sentiment or beware the hype when it adds new members….CLICK for complete article
Over the last few months, the markets have become engulfed by a palpable feeling of exuberance. I remember the last time investors were engulfed in a near “panic” to invest. It was 1998, where following a correction, the market began a seemingly endless run to the peak in 2000.
I’m not too fond of market analogs as no two market environments are ever the same. However, there are many comparisons currently to the late 90s to explain the current bull market. The chart is below.
Gambling in the stock market may be fun in the short-term. However, it would be best if you always remembered why Las Vegas makes billions in profits every year.
If you play long enough, “the house always wins.” FULL STORY