Bankruptcies, riots, struggling economy…
It appears that no news, no matter how negative, can stop the surging stock market.
With some indices, such as the tech-heavy Nasdaq Composite turning parabolic in the last couple of days.
I don’t know about you, but when I start seeing prices advance at such rapid speeds without fundamentals to support them, I begin to worry that we are in a bubble.
Especially when I hear the bulls justifying their outlook with the phrase “It’s different this time.”
I agree. The current crisis is, without a doubt, unlike anything we’ve seen in the past.
However, what is similar to past market bubbles is the type of irrational behavior we’re seeing from investors right now.
Chances Of The Stock Market Declining Are Zero
The underlying theme during the last couple of weeks has been that the stock market is in a win-win situation.
If the economy does re-open and recovers swiftly, then the stock market should return to the pre-crisis levels and continue its upward trajectory.
And if the economic recovery is slower, then the government and the Fed will provide even more stimulus, which, again, should push the stock prices higher.
Therefore, since there’s nothing to lose, many are acting as if no price is too high.
This thinking has prompted novice investors to start piling into the stock market in droves.
Right now, Google search phrases “Day trading” and “Call options” are at an all-time high. People are searching them about twice as much as in normal times.
And these are not professional traders. They already know how to trade and what options are. It’s ordinary folks who believe that their recent success makes them a pro.
Barstool Sports Founder Turns Professional Trader
These days, investing legends are springing up like mushrooms.
Just yesterday, I saw a clip of David Partnoy, an internet celebrity and sports blogger, arguing he’s a better investor than Warren Buffet.
He went on to claim how he’s “printing money” and that “Losers take profits. Winners push the chips to the middle.”
How naïve. It’s almost embarrassing hearing an adult speak such nonsense.
Especially when you consider that his track record spans back three months and that his claim to fame is investing in airlines—a high-risk high-reward type of trade.
But, let’s see how far that approach takes him.
Unfortunately, he’s hardly the only one.
But before I move on to more irrational behavior, I just want to throw in a quick statistic.
The Buffet indicator—Total US market capitalization (all stock valuations combined) to US GDP—is higher today than it was during the Dot-com bubble.
Furthermore, over the last three years, whenever that indicator moved above 140%, a correction followed soon thereafter.
Right now, it’s at 151%.
Investors Haven’t Been As Greedy Since The Cryptocurrency Bubble
The last signal of bubble behavior is stock selection.
When looking at what retail investors are buying, the focus is on one thing and one thing only—high-risk stocks.
The most popular trades on the retail investors’ app Robin Hood include stocks like Hertz, which is in the middle of a bankruptcy, Luckin Coffee, a company that recently got popped for inflating its revenue figures by 100%, and GUSH, a 3x levered oil ETF.
Why are those investments suddenly so popular? Well, the answer is simple. High risk = high potential returns.
If there’s no scenario where the market could decline, then you might as well go for the juiciest trades.
Moreover, it’s the only way for new investors to make up for the lost time and missed opportunities.
This is a typical FOMO (Fear Of Missing Out) behavior. Remember the cryptocurrency bubble? It wasn’t the most fundamentally robust coins, such as Bitcoin or Ethereum, that were making the highest gains near the peak. It was obscure currencies with dubious business models.
Given all the excessive greed, my advice to you is the same that it’s been for the last month—be smart.
Don’t chase prices at these levels. You are more likely to incur losses than make huge gains.
I’m not trying to call the top here. Irrational exuberance can take some time to play its course. But there are more signs every day that this rally will end soon. And when it does, it will do so violently.
Let yesterday’s mini crash be a lesson to you. Everyone is nervous about the high prices, and at the first sign of a panic, they will rush for the exit.
If you’re already invested in the market, then I would suggest you consider protecting the gains you’ve made so far. Take some of the profits and move that money into gold. By diversifying your portfolio that way, a crash won’t hurt you as much.