HOW TO SEE BUBBLES, ACT ON OPPORTUNITY, WIN
- There's a lot of talk of market bubbles recently
- Often a normal correction is called a bubble
- But bubbles are rare & brutal, even to long term investors
See how to profit from the euphoria & get out without undue risk
THREAD 👇
- There's a lot of talk of market bubbles recently
- Often a normal correction is called a bubble
- But bubbles are rare & brutal, even to long term investors
See how to profit from the euphoria & get out without undue risk
THREAD 👇
3 LEVELS OF BUBBLE ANALYSIS
1. Valuation Narratives
2. Market Sentiment
3. Market Print: Bubble Signatures
1. Valuation Narratives
2. Market Sentiment
3. Market Print: Bubble Signatures
VALUATION NARRATIVES in Different Market Phases
Bubble Pop: Can the company survive?
Bear: Can the company minimize losses, remain profitable?
Bottoming: Can the company grow?
Bull: Can the company grow faster than expected?
Bubble: Can the company become 10x, 100x bigger?
Bubble Pop: Can the company survive?
Bear: Can the company minimize losses, remain profitable?
Bottoming: Can the company grow?
Bull: Can the company grow faster than expected?
Bubble: Can the company become 10x, 100x bigger?
During:
Major crashes
Valuation narratives are focussed on the quality of the balance sheet
Strong, sustainable growth periods
Valuation narratives are focussed on reasonable future cash flow expectations
Bubble Euphoria
Valuation narratives are focussed on lofty aspirations
Major crashes
Valuation narratives are focussed on the quality of the balance sheet
Strong, sustainable growth periods
Valuation narratives are focussed on reasonable future cash flow expectations
Bubble Euphoria
Valuation narratives are focussed on lofty aspirations
To know what kind of valuation narrative is reigning
Conduct a reverse-DCF analysis to see what the market price is implying about expectations. Are they conservative, reasonable or unrealistic?
For retail investors if you don't know about reverse-DCFs
- Learn
OR
- Skip this
Conduct a reverse-DCF analysis to see what the market price is implying about expectations. Are they conservative, reasonable or unrealistic?
For retail investors if you don't know about reverse-DCFs
- Learn
OR
- Skip this
MARKET SENTIMENT
Identifying the euphoria phase in a market cycle is critical to identifying a bubble.
One way to spot euphoria is to look at people who are CONSISTENTLY followers of their friends and family in trends, often driven by FOMO.
When they get in, it is a bubble.
Identifying the euphoria phase in a market cycle is critical to identifying a bubble.
One way to spot euphoria is to look at people who are CONSISTENTLY followers of their friends and family in trends, often driven by FOMO.
When they get in, it is a bubble.
MARKET PRINT: BUBBLE SIGNATURES
The last 2 sections are common knowledge
I have said nothing new
In this section
I share my Bubble Signatures criteria
Which is the result of my extensive study on market bubbles
We will also look at many case studies.
1st the Bubble Signatures:
The last 2 sections are common knowledge
I have said nothing new
In this section
I share my Bubble Signatures criteria
Which is the result of my extensive study on market bubbles
We will also look at many case studies.
1st the Bubble Signatures:
Bubble Signatures Before the Pop:
1. In the middle of an incumbent uptrend, there is a sudden burst of rising and accelerating volatility in the up-moves
2. There is no market scare or fear-inducing move that would have caused panic-selling prior to the sudden volatility increase
1. In the middle of an incumbent uptrend, there is a sudden burst of rising and accelerating volatility in the up-moves
2. There is no market scare or fear-inducing move that would have caused panic-selling prior to the sudden volatility increase
Bubble Signatures After the Pop:
1. USUALLY a >70% drawdown from the peak
2. A slower, gradual recovery as opposed to rapid, sharp recovery
1. USUALLY a >70% drawdown from the peak
2. A slower, gradual recovery as opposed to rapid, sharp recovery
Now we go into a few CASE STUDIES
To see historically, what was a bubble
And what was simply a correction
To see historically, what was a bubble
And what was simply a correction
DOW JONES INDUSTRIALS AVERAGE
1929 CRASH
✅BUBBLE
1929 CRASH
✅BUBBLE
DOW JONES INDUSTRIALS AVERAGE
1970s HIGH INFLATION TIME
❌BUBBLE
1970s HIGH INFLATION TIME
❌BUBBLE
DOW JONES INDUSTRIALS AVERAGE
1987 BLACK MONDAY CRASH
✅BUBBLE (a smaller one)
1987 BLACK MONDAY CRASH
✅BUBBLE (a smaller one)
DOW JONES INDUSTRIALS AVERAGE
DOT-COM BUST
❌BUBBLE (at the Dow Jones stock market index level)
DOT-COM BUST
❌BUBBLE (at the Dow Jones stock market index level)
NASDAQ COMPOSITE (TECHNOLOGY SECTOR)
DOT-COM BUST
✅BUBBLE
DOT-COM BUST
✅BUBBLE
DOW JONES INDUSTRIALS AVERAGE
GFC (2008)
❌BUBBLE (at the Dow Jones stock market index level)
GFC (2008)
❌BUBBLE (at the Dow Jones stock market index level)
NIKKEI 225
1990 CRASH
✅BUBBLE
1990 CRASH
✅BUBBLE
ARE WE IN A BUBBLE NOW?
❌BUBBLE
❌BUBBLE
PLAYING THE OPPORTUNITY
Bubble euphorias can go on for a very long time (see NIKKEI 225 example) and are a great source of profits for the trader
But one must ALWAYS be on guard. How?
One way is,
For a bubble signature on the Monthly
Get out when the Weekly makes a Lower Low:
Bubble euphorias can go on for a very long time (see NIKKEI 225 example) and are a great source of profits for the trader
But one must ALWAYS be on guard. How?
One way is,
For a bubble signature on the Monthly
Get out when the Weekly makes a Lower Low:
For long term investors,
Select stocks based on reasonable future cash flow expectations
This will help avoid the hype and crash in Market Bubbles
Select stocks based on reasonable future cash flow expectations
This will help avoid the hype and crash in Market Bubbles
This info about Bubble Signatures is a key source of edge for the investor/trader
As it allows one to have a confident view on stock market health, based on a process supported with empirical evidence
Follow me on Twitter for more
seeactwin.substack.com for more in-depth stuff
As it allows one to have a confident view on stock market health, based on a process supported with empirical evidence
Follow me on Twitter for more
seeactwin.substack.com for more in-depth stuff
@TihoBrkan , @alphaarchitect
This thread has the expanded reason for why I think we are not in a bubble.
This thread has the expanded reason for why I think we are not in a bubble.
@Callum_Thomas : Perhaps you would also be interested
NASDAQ COMPOSITE (TECHNOLOGY SECTOR) vs DJI was also a bubble in 2000s
But it is not now:
But it is not now:
LIVE EXAMPLE OF BUBBLE SIGNATURE PLAYING OUT:
#ResMed vs #Verisign spread RMD/VRSN
$RMD $VRSN
See seeactwin.substack.com/p/long-short-e… for another detailed example of a long-short equity trade
#ResMed vs #Verisign spread RMD/VRSN
$RMD $VRSN
See seeactwin.substack.com/p/long-short-e… for another detailed example of a long-short equity trade
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