Commentary: We need more irrational behavior to create a real bubble
Watching the Dow Jones Industrial Average top 16,000, many investors are hoping this market is in a bubble (so they can shrewdly buy stocks at lower prices when it pops). But we have a long way to go for that.
Right now, the most important part of a bubble is missing — the mania. We need intoxicated investors, a buying frenzy, over the top speculation, and a get-rich-quick mentality. A bubble without a mania is like an ice cream sundae without a cherry. We can do better.
Although it’s possible to have a bubble without a mania, those maniacal meltups help historians confirm whether it was a true bubble. Also, meltups make you feel rich before you go broke (be sure to save your statements so you can remember how much you could have, should have, and would have made if you had sold in time).
There are some signs of exuberance. Mutual funds are bringing in a lot more cash, some money managers are afraid to miss the expected Christmas rally (and their year-end-bonuses), the VIX remains in the complacent zone at 12, and the Investors Intelligent sentiment survey is over 50% bullish.
That’s a good start — but nothing like a true bubble. In the old days, bullish sentiment readings were off the charts at 80%. We can do better.
If this were a traditional bubble, I’d be getting stock tips from supermarket baggers, cabdrivers, and my barber (he tells me no one is giving him tips, either).
Rather than bubbling with excitement because the market more than doubled, investors seem disinterested. They aren’t buying stocks like in 1999, or buying houses like in 2007. In fact, I don’t know what they’re buying. Now that those 401(k) accounts are finally getting back to even, investors need to step up to the plate and push this market much, much higher.
Dow 20,000 is possible
After we breached 16,000 for the first time the other day, the folks at CNBC put on their party hats — but you ain’t seen nothing yet. To make this the real deal, we need a little parabolic action.
Dow 20,000 has a nice ring to it. In fact, Dow 20,000 is not only doable, but also reasonable (yes, we can do 25% in six months). It may also boost the bullish juices if someone wrote a book, Dow 20,000 (note to publishers: the title is available).
If you want to see a real bubble in action, take a look at China. Hong Kong’s Hang Seng Index was at 20,000 in July; now it’s around 24,000 (almost 20% in four months beats the U.S. market). On some days, the Hang Seng rallies by 5% to 7% (that’s 1,000 points on the Dow). On a typical day, the Hang Seng might be up 3%. In China, they know how to do bubbles (and like all bubbles, it will not end well).
The Fed can help
Our so-called bubble is boring compared to China. With the helium the Fed is pumping into the economy, it’s going in the right direction, but not fast or high enough. We need to catch up, so I’m wondering if the Fed can do more. Rather than reducing quantitative easing, how about increasing the bond buying to $100 billion a month? That would keep interest rates low and delight the stock market.
The only problem: QE is similar to investing in penny stocks. Easy to buy, but hard to sell. I have no idea how Janet Yellen is going to end this experiment after she becomes Fed chairman, but if it continues, it will really light a fire under the stock market. Maybe then we’ll have the euphoria that is so desperately missing. It would be a short but random walk to Dow 50,000.
Stop talking about bubbles
To my fellow financial market writers: Please stop writing about bubbles. How can we have a bubble if you keep writing about it?
The whole idea is that a bubble is a secret until after it pops. Do you think they announced it was a bubble when the Dutch were trading tulips? In 1929, no one wanted to jinx the market and discuss bubbles, and if you did, they’d recommend a good psychiatrist. In 1999, investors thought dot-com stocks would go up forever. And in 2007, most people didn’t think there was a housing bubble. At the time, it seemed perfectly natural for housing prices to double and triple within a year.
Those were the bubble years, and we can do it again if we try.
Advice from Bernard Baruch
In case anyone mistook my attempt at humor for reality, allow me to redeem myself. Here is some serious advice from financier Bernard Baruch. Asked how he made so much money in the stock market, he replied: “By selling too soon.”
Bottom line: Only you can decide if the potential reward is worth the potential risk. The market is priced for perfection, and nobody is perfect, not even Mr. Market (unless you think it really is different this time).
Michael Sincere is the author of “Understanding Options,” “All About Market Indicators,” and “Understanding Stocks.” His website uses indicators and analysis to determine if it’s a bull or bear market.