Is The Bubble About To Burst!
“The market can stay irrational longer than you can stay solvent.” John Maynard Keynes
What exactly is a Market Bubble?
A market bubble occurs when the price of stocks, or any asset, grows to a point where the price far exceeds the value.
Essentially, the market is overvalued and a correction occurs to bring it back in line to the level where it should have be. It’s not an exact science.
Many senior market analysts refer to that place as the “Mean”. And they use terms like “revert to the mean” to describe what will happen when the bubble bursts including the approximate bottom.
Of course, they are all guesstimates based on numerous factors including past history.
Considering “the mean”, for today’s S&P 500 it would be approximately $2,500, which essentially equates to a 50% decline. When you consider that the S&P 500 represents the largest companies in the US, the decline in the Nasdaq and the Russell could be even larger.
Jeremy Grantham, the CEO of GMO Investments, is predicting a decline greater than the “dot com” bubble bursting in 2000 in which the S&P 500 declined 50% and the Nasdaq declined 82%.
The decline beginning in 2000, was in fact, not a sudden crash but a slow decline in which the market had some fits and starts much like we’re seeing today. As a result, it took over 3 years before it hit bottom and 13+ years to break even, due the next financial crisis in 2008.
When you are down 50% your investments have to grow by 100% just to get back to even. Think about that. They have to double just to get back to even. And all the while the clock is ticking.
On June 1, 2022, Jamie Diamon, the CEO of JP Morgan Chase, said this:
“It’s a hurricane,” Dimon told a banking conference, adding that the current situation is unprecedented. “Right now, it’s kind of sunny, things are doing fine. Everyone thinks the Fed can handle this. That hurricane is right out there down the road coming our way. We just don’t know if it’s a minor one or Superstorm Sandy,” he added.” (source: reuters)
He said the bank is carefully managing its Balance Sheet. He didn’t say what we should do to get prepared.
Therefore, you may be asking. What can we do about it?
If you are currently invested in Stocks, ETFs or Closed End Funds, we would suggest that you review your Risk Management approach.
If you have been following Trending Stocks, you know that we believe the most important aspect of investing is Risk Management.
One of the key actions investors should take is always place a prudent Trailing Stop Loss Order after every stock purchase.
We believe it is so important that we now calculate a Stop Loss for every stock – whether it is Trending or not. It’s calculated using both recent volatility and generally accepted principles. There’s no guess work involved.
For non-trending stocks, select Search by Stock and entire the Symbol.
THE “TODAY’S RESULTS” REPORT PAGE SHOWING STOP LOSS ORDER POSITION FOR EACH STOCK IN BOTH DOLLAR AND PERCENT
So, verify with your broker that you have one in place for each stock that you own.
Risk cannot be eliminated but it can and should be managed. “Rule # 1, don’t lose money.” Warren Buffet
Think about this for a minute.
When the Bubble Bursts, if your trailing stop loss transactions take you out of most, or even, all of your positions, you will be sitting on the sidelines WITH MOST OF YOUR CASH, ready to take advantage of:
- those great stocks that have hit bottom and are in recovery.
- the stocks that are actually benefitting from the current situation. (like Zoom, Disney, Amazon, FedEx, etc, etc, did during and after the flash crash of 2020)
And, you’ll be able to buy a “bargain” prices.
Let’s face it. There’s a lot of money to be made after a big decline, but only if you have the cash to take advantage of the great buys.
Want to know more about Trailing Stop Loss Orders?
You can a) send us a question by replying to this email, b) send a question to firstname.lastname@example.org or c) go here and select What is a Trailing Stop Loss and When Should I Use It? Lots of options!
We want you to be successful in investing! So remember: Ride Your Winners; Cut Your Losses.
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