Bubble in the finance world
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The first lesson I learned about investing at the age of 11 was to know which way the market was going. Is it going up or down? It sounds too simple, but it’s the last thing most people consider. Buy-and-holder investors take it for granted that the market will go up forever, and to be fair, the long-term record supports that – so long as you don’t stray too far from the index.
However, for people who read articles like this, index tracking isn’t what they’re interested in. After all, getting out near a top and back in near the bottom can be extremely lucrative. Long-time readers here have seen me pull off this maneuver several times over the past two decades.
And so, here we are again, with markets going wild. In my view, the Nasdaq has entered a bubble. It’s still early, and it could run for quite some time, but unless the current trends break, the bubble will keep building.
Here’s a medium-term chart that shows the clear trend:
The Nasdaw chart showing the clear trend – a bubble?
Credit: ADVFN
This trend looks very likely to continue, and if you zoom out, you’ll see that the Nasdaq’s ascent has displayed almost magical stability. After all, that kind of stability is what conjures up trillion-dollar companies.
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The Nasdaq is the king of markets. As it goes, so go the world’s markets – and the global economy, too.
This next chart doesn’t look like a bubble at first glance, but you have to step back to see the bigger picture:
The Nasdaq chart – the bigger picture
Credit: ADVFN
You might say this is a contrived chart, and you’d be right. It’s not a prediction – it’s a map. But if we are in a bubble, this is roughly how the chart will evolve.
The key is to remember the law of bubbles: “up like a rocket and down like a rock.” A bubble feels fantastic on the way up. The trap is that you feel euphoric as it rises, hold when the rally stalls, hold when it drops, and end up riding it all the way down until all those lovely profits are gone. It’s a painful and expensive lesson – one that many learned the hard way in Bitcoin last week when it crashed on China trade war worries.
Now let’s look at gold. It’s also in a bubble, and that bubble could run and run. But here’s a chart worth considering:
The gold chart – boom or bubble?
Credit: ADVFN
To me, $5,000 is the next stage of the gold boom – or bubble. If and when we get there, I’ll be asking whether it’s the top… or perhaps just the halfway mark. That’s how I approach trading bubbles. As a child might say, “Are we there yet?”
“Top or halfway” is determined by the random nature of markets, and we won’t know until we arrive – if we arrive. But you can see how the bubble is forming, and you can visually grasp its potential.
These are interesting times for the Nasdaq and precious metals, with plenty of upside potential. It’s a kind of hell for long-term investors but a heaven for traders. For those of us somewhere in between, it’s going to be a bumpy ride – but at least one filled with opportunities galore.