Technical Analyst, Saxo Bank
Summary: Some you might have heard me talking about bubble scenarios and the Anatomy of a bubble. It is a topic I have discussed in detail during my Trading Psychology seminars and a topic I will talk more about in the future.
What is a bubble? In short:
During these four phases investor and trader psychology plays a major role in the build up to the top and subsequent implosion. That I will talk about in a later piece/webinar.
Previous bubbles During the .com bubble there was only one Pre-peak/major correction (Index dropped 33% in two months) occurring late in the Awareness phase. After that the market sky rocket until it collapsed.
Are we in a bubble scenario?
It has been an ongoing discussion amongst Economists and Technical Analysts the past couple of years; are we in a bubble scenario? For sure some of the characteristics have been there but we needed at blow off top to perfect the scenario. Maybe that is what markets are warming up to.
With the new all-time highs in Nasdaq, Dow Jones Industrial and S&P 500 this could be the blow off top which could conclude the bubble scenario. As previously mentioned, a blow off top is an almost vertical move created by investors suffering from FOMO (Fear Of Missing Out). FOMO seems to dominate a lot of the market activity, as mentioned in these two articles
https://www.marketwatch.com/story/dont-give-in-to-stock-market-fomo-at-record-highs-says-wall-street-bull-2019-11-26
and here
https://www.marketwatch.com/story/fear-of-missing-out-triggers-huge-fund-manager-shift-from-cash-to-stocks-bank-of-america-merrill-lynch-says-2019-11-12
Apparently, there is a lot of money on the side line ie. in cash or short-term bonds yielding next to nothing.
And if you’ve got cash, where should you put your money in hope to get a return? Interest rates are low/negative, Commodities are not really moving or too risky and not easily tradable for most investors, which leaves equities as the only asset class. With new highs in many US Indices you don’t want to look like a fool staying on the side line. You are hit by FOMO.
A widespread FOMO could lead to a blow off top. Looking at the Nasdaq composite from 2010 and up to date (below) the Index certainly has a pattern that resembles many bubble patterns we have seen over the past 100 years in financial markets.
There is no strict rule for the time between last major correction and the blow off top.
However, when we see a bubble scenario*) with identical characteristics ie. two pre-peaks (two major corrections) as there seem to be here historically the Blowout top is concluded from a couple of months and up to typically 12 months after the pre-peak low. However, some do take longer but usually never more than 18 months **).
Comparing Dow Jones 1920’s to today’s market *) Note: Bubble scenarios are not limited to longer term time ranges. Identical patterns are seen in abundance in any asset on any time range even intra-day.
**) Based on the numerous bubbles I have analysed in various asset classes.
Bond. Long Bond(s)
With real rates being too positive, we see three scenarios: Opportunity to lock in rates at cycle high, government overreach to keep the economy afloat or a complete reset of the economy.
Steen Jakobsen,
Chief Investment Officer
Is a bond bull market ahead? Inflation still poses a risk for investors, but the moment for increasing duration to your portfolio may be approaching towards the end of the year, when central banks might be forced to cut interest rates.
Althea Spinozzi,
Senior Fixed Income Strategist
The furious rate hike cycle has brought gains in the US dollar, but with stagflation risks in Europe and the UK and weakness in the Chinese economy, USD may have more room to run. But a strong dollar could also have repercussions for US growth, emerging markets and commodity prices.
Charu Chanana,
Market Strategist
With the cost of capital rising painfully, stagflation fears are back, illuminating the fragile state of the green transformation, while giving a tailwind to nuclear power, and threatening the growth of AI-related stocks.
Peter Garnry,
Head of Equity Strategy
With supply tightness not only in energy but all commodities, the momentum in commodity prices may continue, pressuring central banks to lower real rates. That could be a good setup for precious metals, including gold, silver and potentially platinum as well.
Ole S. Hansen,
Head of Commodity Strategy
As the pandemic showed, even the US Treasury can experience seismic shifts. With the government increasing the pace of issuing bonds to support fiscal spending, the complex Treasury market and regulatory constraints could spark a liquidity event.
Redmond Wong,
Market Strategist
The tide has turned for bonds. Given the current yields, bonds have become an attractive investment, with added benefits including lower risk than stocks, increased diversification and a steady stream of income unaffected by economic changes.
Peter Siks,
Investment Coach
