Investors spot signs of market froth -- Ya think?

Investment Analysis Clubs Macro Economic Trends and Risks
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https://www.wsj.com/finance/stocks/investors-spot-signs-of-market-froth-during-long-bull-market-f14f44c6?mod=hp_lead_pos1

Investors Spot Signs of Market Froth During Long Bull Market

Some fear growing speculation in options, meme stocks and crypto

By Krystal Hur, The Wall Street Journal, Feb. 16, 2025

Investors are fearful that some market gains are outpacing typical measures of underlying value after strong economic growth helped power the S&P 500 to record after record in a nearly two-year bull market.

Trade wars and DeepSeek’s challenge to the AI boom have barely dented the enthusiasm. Meme stocks are back, options are on fire and bitcoin is trading around $100,000. That makes some traders nervous, because rising speculation can lead to market imbalances that at times presage sharp corrections…

[snip list of meme stocks’ high growth rate]

About 58 million options changed hands daily on average in January, a monthly record in data going back to 1973, according to equity derivatives clearing organization OCC. That follows a record year for options trading volumes in 2024…

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[snip cryptocurrency, meme coins, betting of all kinds]

Meanwhile, stocks look generally expensive…Strong earnings growth has helped support the rally this year: Companies in the S&P 500 have reported a 16.7% jump in profit so far this reporting season. Some analysts warn that elevated interest rates could cut into those profits. … [end quote]

The article didn’t mention margin, which correlates with the stock market. Margin drives demand with borrowed money and is also rising.

Or the Cyclically Adjusted P/E Ratio which is the highest in stock market history other than the dot-com bubble.

There’s no telling how long this speculative bubble will last before it bursts. Bubbles are always exciting. Speculators always congratulate themselves on their exciting wins.

Be careful out there.
Wendy

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Bloomberg on record „Stock fragility“ - a leading indicator?

Stock fragility, a measure of a company’s daily share-price move relative to its recent volatility, is on track to reach its highest in more than 30 years among the largest 50 stocks in the S&P 500 Index, based on the average magnitude and frequency of such individual shocks so far in 2025, according to Bank of America Corp. strategists. That’s as far back as their research goes, and covers not just the internet boom but also Russia’s default and the Asian financial crisis earlier in the ‘90s. The increasing jitters among single stocks flashes a potential warning for the broader market even as stock indexes hover near records — and combined with tariff and interest-rate concerns adds to a potentially worrisome mix. …

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You hold a ten thousand dollar Chinese vase in your hands

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It’s fragile. It’s terrifying, Drop it and $10,000 just disappeared.

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Does any Fool know what single-stock fragility means?

I had never heard of it before and I’ve been in the market for over four decades. Whatever it is it sounds terrifying! :fearful:

Google is your friend…

We define an asset to be fragile if it is susceptible to non-fundamental shifts in demand. An asset can be fragile because of concentrated ownership, or because its owners face correlated or volatile liquidity shocks, i.e., they must buy or sell at the same time.

1929 was a good example, everybody had giant margin accounts and when the market broke, everybody got margin calls.

Do you have to sell when your stock drop in price? If not, then you don’t have to worry about single-stock fragility. Your personal liquidity status trumps fragility. ETFs, funds, and other institutions have to worry about these things but not individual investors.

o o o o o o o o o o o o o o o o o o o o o

Milking Volatility

A long time ago I set out to make money on volatility.

Pick a volatile stock of a sound business

  • Buy some shares
  • When they go up, sell some
  • When they go down, buy some
  • Rinse
  • Repeat

My TSLA cost basis is Negative $-3.99 and I still have the stock.

The one thing to concentrate on for individual investors, make sure you own sound companies. The other thing, make sure you have enough liquidity that you are never forced to sell.

The Captain

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Yep. For the last 30 years, I’ve kept 5 to 10 years’ worth of living expenses in cash and short-term fixed income securities. (There’s nothing unusual in that if you’re following the “4% rule” from a 60% stock, 40% fixed income portfolio – the 40% is equal to 10 years of withdrawals.

But as my stock portfolio grew over the years, I decided to hold the fixed income portion at 10 years worth of living expenses, and let the stock portion grow “skim-free” without the fees, commissions, trading costs and taxes incurred by those that buy & sell in response to fashion, market conditions, and interest rates. So when my retirement portfolio doubled in 1996, I was 80% stock, 20% fixed income. When it doubled again in 1997, I was 90/10. I’ve been 90% plus stock ever since.

Market downturns of 50% or more in 2000 and 2008 are lost in the round off over the long term. Today my 10 years worth of living expenses is 3% of the portfolio value and I’m 95% plus stock. (And note, you didn’t have to buy DELL and Pfizer in the 1990’s to get that kind of performance. Merely holding the S&P 500 over the last 30 years would have grown your nest egg 20-fold with dividends reinvested.)

I’m pretty sure another 50% plus stock market decline will come during my remaining lifetime. Don’t know when, or care, because I’ve seen them before and did just fine.

intercst

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