The ‘Bubble Question’

I get this question everyday. I use the term ‘bubble’ more of late because the world is so connected and these pockets of euphoria continue to pop up.

Fred Wilson has been hearing it a lot as well. Here is his post this week on the subject. Read it all, but here is his conclusion:

It’s been a good time to be in the VC and startup business and I think it will continue to be as long as the global economy is weak and rates are low.

I like to keep the big picture simple and with this backdrop since 2009, I have been long (never enough) and continually putting money to work.

I have already found an investment strategy that works for me and as a bonus it makes my limited partners comfortable to invest with me as well. With that established, for years I am trying to fill my funnel with ideas, people/teams and stocks that fit this profile.

The more subtle part is trying to take your foot off the gas – even slow down and possibly reverse – before the larger backdrop changes. For that part, I want to follow the best of the best, people that have seen and invested through the ‘slopes’ as I call them. In 2001, and 2008, the slopes were sickening to the downside. Today, they are getting silly to the upside. I also want to feed myself with historical data and charts have helped me get through the tediousness of it.

The ‘slopes’ matter to me because I also invest in public markets and historically, the steeper the upslopes, the steeper the inevitable declines.

I also know (having tried mostly fruitlessly to time the turn in the ‘slopes’), that trends can run much longer than expected.

So, for stock market trends I like more historical data to help me ‘look out’ over the edge. I also like to use bigger data sets and longer look back periods.

This one chart has got my attention this weekend from Ryan Detrick:

Here are all the times $RUT was 40% over 40-week MA. Not a pretty picture. $IWM

— Ryan Detrick (@RyanDetrick) Mar. 15 at 06:56 AM

I know from other charts and the sentiment I see on Stocktwits and my travels that the slopes surrounding me (including the explanations from Fred’s post) are ‘steep’ to the upside. I also can take one look at this data and say the odds are pretty good that 6 -12 months out we could be in the middle of some good declines based on the historical data for US Small Cap Stocks.

The past few weeks I put on some short positions again adding $BIS and $SDS (in real-time on Stcoktwits). They are working, so even though I am making a few ‘Rubles’, I am not thrilled. I may cover Monday but I could also be forced to sell more of my longs. Like I said earlier, I have enjoyed this ride since 2009 and I don’t want to accelerate into a wall. The data I am putting together combined with my risk profile says to slow down.

Chime in of course.


  1. Clint Barnette says:

    Why are you choosing SDS instead of an RWM or equiavalent bearish Russell ETF? Since the Russell has run further to the upside than the S&P….

  2. JFinDallas says:

    Even though I can spot quite a few indicators of excessive optimism or frothiness in the market that remind us of the last time we had a “bubble”, there is one fact that is striking to me, when we where at the top of the “bubble” in 2000, everybody was all-in, with pie in the sky optimism and very few people were calling for caution, the fact that it had been a bubble became only apparent to the majority a good year or 2 later.

    Today I see the opposite, 1929 talk, bubble headlines in every financial outlets, worries everywhere (unemployment, slow economy, geopolitical, China, Japan, deflation, currency wars) last week I have only seen comments about the fact that we are at a major top and can only go down from here.

    Another thing that I have noticed, mostly via conversations through ST with a lot of people that I would qualify as “retail” investors (nothing wrong with that) or inexperienced (they often describe themselves as “novice” in their own bio), not only they haven’t been part of this monster 5 years bull market but they want to be or have been short…

    During the last “bubble” the companies that were the most inflated had only dreams of the “New Economy” for fundamentals and very little to show for in terms of revenues, today a lot of the companies that could be singled out as “bubble” types are on very strong growth trajectory and are growing revenues at very impressive rates.

    The IBB Biotech sector is definitely very stretched here and I probably would not want to be putting some new money at work there now, but you can not deny the secular trends in place (aging population with higher life expectancy, billions more dollars flowing to healthcare via Obamacare, innovation acceleration shortening the time to market) that are growing the tsunami of dollars hitting this sector now and in the next 20 years.

    It is human nature to expect that what we have experienced in the recent past is going to keep happening going forward and that’s why the majority has been so bearish since 2009, they are waiting for the crash of 2008 to happen again, but the truth is things keep changing and even though we keep looking at charts for clues and some human behaviors keeps repeating in certain circumstances, most of the time the market is doing something completely new that it has never done before.

    To expect that the market is going to deliver the same returns that it has in the past 2 years would be delusional and equivalent to thinking that PLUG shares are going to double every week, but when I look at: the accelerating pace of innovations (even in “old economy” sectors like energy and manufacturing), the fundamentals of a lot of the leaders of this market (for some of them the main problem seems to be that they are generating too much cash…), the XLF financials are in better shape that I can remember (with wider capital base and clean balance sheets) and have basically a license to print money now, and the growth that I see in certain sectors (Chinese internet service sector has been a favorite of mine as I believe the adoption and use of services delivered online is starting to accelerate exponentially, the same way it has in the US in the past 10 years), it’s hard to be really bearish for stocks.

    During the bubble the blue chip tech stocks Cisco, EMC, traded 200+ times forward PE, Apple trades at 11X forward PE and even Facebook trades at 40X forward PE.

    Now could or should we have a flat year or down 10% year? yes we are definitely due for one of those now. Is the Fed tapering/tightening going to take some wind out of the stock market sail? definitely. Are we going to have some high volatility events leading to some big swings? of course we will, they always come around with some statistical regularity. But that doesn’t mean we are in a bubble and I think the people that keep betting on a market crash are going to keep losing money.

    I had the chance to be an active participant and to witness the birth and death of the last bubble, and I am often very quick and vocal to point out things that remind me of the last bubble (I wrote a whole piece on SA on a bubblicious stock last week…) and I think we are not there yet.

      • JFinDallas says:

        Hum hum… Peaked? possible, what’s your time frame? Since “bubbles” is what we are talking about here, when the last bubble popped the Nasdaq went from 5000 to 1000, is that what you are expecting from here? Anything is possible but I am not sure I can see what conditions would warrant such a compression in the valuation of equities.

  3. pointsnfigures says:

    saw an article on a health company that filed for an IPO. $13M in revenue, $3B valuation. I can see how people think things are frothy. If the market were to tank, what’s the Fed going to do to lower interest rates below 0%?. Maybe this time they will send out the helicopters.

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