Is it possible for bubbles to "begin" during a recession?

Investment Analysis Clubs Macro Economic Trends and Risks
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I am pretty much resigned to watching rather than participating in the rally ( I have to sell some to buy anything, and tough to do it when what I am selling is more than 60-70% down!!!)

But have been closely watching the market to understand how it functions.

It is clear to me that I joined the SAAS and COVID related stocks after the rally had already run its course…and looking back, I see this bubble started in 2018 or so…with 2020 making a killing!!!

So, now we have the AI hype/ mania/ bubble…It doesnt matter what we call them, but the market reaction has been nothing less than stunning!

And the most bewildering thing to me, is that while people are harping about recession…the analysts from the same team are also updating and re-updating theri guidance with eye popping targets!!

I mean, it is one thing to say that Bank of America coming with a $450 target for NVDA in the aftermath of the block buster earnings…but, but, in just a few more days, they have revised it…to $500!

And needless to say, there are some fundamentally sound stocks which seem to be running with NVDA ( but sadly, there are also crap stocks riding the wave!)

So, the question is: How long do bubbles last? If we are in the beginning of the AI bubble, how long does this run for?

And in your experience, have you seen bubbles arising amid expected recession?

I am glad I am not running an active ETF or mutual fund…This is likely driving them crazy!!! They can not afford to sit out, as they will be questioned why they don’t have the years hottest stocks…

This last 2 years have aged me by 20 years!!!

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No advice from me. I would not want to be in that situation.

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Every bubble is different. But they have a characteristic “blow off” phase where the curve goes straight up and all traditional sense of valuation is lost. Read the book, “Manias, Panics and Crashes.”

And don’t let your greed tempt you to participate in bubbles.

Wendy

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Thanks Wendy for the timely reminder…It is easy for me to not participate. Funds already tied. So, nice to see, watch and learn.

But some things are so fascinating to watch…I think I see a sector rotation now in the last quarter or so…and on hindsight, it is so obvious that is exactly what happened in late 2021 and 2022, with people selling tech stocks and moving to value/ defensives etc…and now some part of it is rotating back…

So much easier to just buy an index and get on with ones’ life…

If I had been this observant, or better, just learnt risk management, I would have been in a much better space now.

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Hey @Inspired2learn,

I would advise that you don’t chase bubble stocks to try and make up for losses someplace else.

I’d suggest, knowing what you have shared here on TMF, that you stick to low cost indexes and keep investing in them.

'38Packard

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Hi '38Packard,

Thanks for that. Nope, have no intention of buying any of these AI stocks as I am not willing to sell the ones I have which are in their lows…My only positive ones are Berkshire and NVDA, and I don’t want to sell them either.

However, having been burnt before, I wanted to understand how and why a stock moves so much…up or down…

For example, I have realized 3 very important lessons:

  1. Don’t fight the fed…Don’t fight the market.

  2. Never ever try to make the money the same way back as you lost it…

  3. Markets can remain irrational longer than I can remain solvent.

Frankly, if I had realized this at when I was at -10% loss , and just sold everything and put an index, I would be simply elated…

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You win a story! In early 99, I decided I wanted to pick up some Qualcomm, but I had to get my deposit for the year into my IRA before I had enough for 100 shares. In the space of those couple weeks, the stock rose, to, iirc, around $50. I said “drat, probably missed the entire move for the year”. Bought that round lot anyway.

A few months later, some “analyst” put a $1000 price target on QCOM. It never made it. I think I peaked out around $800, before the company did an umpteen to one split.

Then the air came out of it. It didn’t reach the levels of 99 again until 2014.

Steve

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But have been closely watching the market to understand how it functions.

Same here. I don’t have a lot of experience at watching the market but hopefully the following might help you.

...more than 60-70% down!!!

There is a statistic that we can follow that helps avoiding big drops, the Nasdaq 52-week New Highs-New Lows. It looks like this:

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I follow the 13-day EMA (in red), some use a 9-day WMA (not available on stockcharts).

Since it is negative, it tells us that more stocks are reaching a New Low than those at a New High. It is however going up at the moment. You can play with it, try different dates when we had a bear market and $NAHL will go below 0 pretty much in every case.

I think Zeelotes posted about $NAHL on Saul’s board in November 2021 to warn that there was danger ahead. But his message was quickly deleted as it is off topic…

So, the question is: How long do bubbles last? If we are in the beginning of the AI bubble, how long does this run for?

We all would love to know that! But if you know it’s a bubble, all you have to do is to stay away from it so you don’t get hurt when it pops.

And in your experience, have you seen bubbles arising amid expected recession?

My memory says no but after 50, you can’t always trust your memory…

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Legitimately there are people who naturally are stock pickers. You are not really barking up such a tree in your own case. The few that really stock pick are few and far between.

BTW unlike a few things said here I do not see you as chasing bubbles. We are so far off any bubbles I am not sure where the idea is coming from. Unless you are thinking of buying NVDA or some AI stock. I would not go anywhere near those. If those are your thoughts you will lose a ton of money. Or at least really never make much of a dime.

Frankly I can not understand the rotation talk to well because to stock pick you buy the stock itself not the industry or the sector etc…a rotation loses most of its potential meaning. Like herding cats and hoping they all go in a straight line. It aint going to happen.

None of that is advise. Just some observations right or wrong.

ah I have been reading on…the plot thickens.

You have not lost anything as long as you do not sell. You have not timed the market. That does not matter.

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Hi Leap1,

I am but a novice…and from your posts, I beleive you are a far more seasoned investor…but here goes:

In late 2021-and 2022- Energy stocks made a killing…In fact, anything even remotely connected to energy made a killing! And thanks to the one of the umpteen bills/Acts that I have lost count, the solar energy stocks ALL ran…

During those time, most tech stocks very getting killed/ Most SAAS stocks/ cloud stocks were literally getting annihiltated…All I had to do was open my eyes and see!

Dividend stocks/ health sector stocks also did pretty well.

And then in Jan, everything started changing…

Now, with that pattern cleared, I can pretty much choose any stock and see that they more or less followed the aforementioned movement…Some demonstrating monstrous ups and downs!!!

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Look at 1947 to 1950 and 1979 to 1983. The reasons are major changes in US fiscal policy. This period is such a dramatic shift. These are not trustworthy times. That makes for buying opportunities but your ideas are shorter term which does not make for great stock picking.

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Oh now I see what you mean! Thanks, yes I agree.

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And if you had held your shares until today they would be 10x higher for a compound growth rate (ignoring dividends) of 10%. With dividends, higher than SPY.

DB2

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If wishes were horses even beggars would ride.

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To mis-quote Heinlein “Stocks are a Harsh Mistress”.

Your statement above, suggests you are emotional about your stocks.
They DO NOT love you back.

A way to lose the emotions is to just sell.
Just do it.
A stone cold break up
Once you’ve sold, you can re-evaluate each and decide if you would buy it again.
If yes, then WAIT 35 DAYS after your sell date, … Avoid the “Wash Sale” trap.

If you don’t want to just sell, then evaluate each stock for its investing thesis.
WRITE IT DOWN.
Would you buy it today?
Yes? Put a green check by it.
No? Put a red X by it. And sell it.

Compare your thesis for each stock today, with the thesis under which you originally bought. If the thesis has changed, consider selling and put the money somewhere with a thesis you like.

As for “if I sell, I’ll lock in a REAL loss!”.
That’s your ego. Ie emotions.
Let it go.
If you wouldn’t buy it today… let it go.

Don’t let emotions/ego control your investment - either with buy, hold, or sell.
Be stone cold.
No love, no anger, no disappointment.

As for the REAL loss, look up “tax loss harvesting”. The loss may not be as “real” as is imagined?

Good luck.
Build an emergency fund, don’t carry debt, and keep investing.
:alien:
ralph

Oh. And, if you have more than 10 stocks, sell some to get down to your 10 highest conviction stocks.

Investigate how stock gains and losses are taxed, and how that affects your taxes over multiple years.
And “wash sale rules”.

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Thanks Ralph…Very solid advice!!!

Will certainly try that and it may help remove the emotions by writing it down…Thanks again…

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Analysts lead by following, that’s why their title starts with AxxL a word forbidden by TMF but which we all sit on, they are built upside down, or backside forward. :upside_down_face:

Only until they pop. :imp:

I have converted half my portfolio to selling covered calls most of which have a lifetime of less than a month, 30% is high conviction Tesla (buy and forget but watch it anyway).

Having researched options for well over a decade I’ve concluded that selling covered calls (properly done) is lower risk, higher return than investing in stocks. Currently I have about 30 stocks as candidates for selling covered calls and I’m evaluating 200 more.

The Captain

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Hi Captain,

I have been thinking a lot about selling covered calls…But how do you choose your candidates?

The ones which give high premium doesn’t necessarily seem like the ones worth betting on a long term { from your posts, I am positive you are a seasoned investor and so would not sell a covered call on a stock unless you are happy to hold it for a long time]

Apart from TSLA, I am just not sure which other stock gives you meaningful premium, but are still worth holding long term…

Would greatly appreciate if you explain how you chose your stocks for covered calls…And i think it is timely I ask you now as you mentioned you are looking at several more now…meaning you would have to buy them at this price in contrast to say selling a covered call on your enphase or tesla stocks that you may have bought a long time back with a very low cost basis { what a wonderful position to be in…and a nice headache to have even if the stocks runs away from you in that setting - so, heads you win; tails you still win}

Thanks a lot
Charlie

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Do not sell covered calls on stocks you want to hold long term, the opportunity loss is too great should they be called. Selling calls on holdings to earn a bit of income is not the winning strategy.

Selling calls as part of an investing portfolio is not the winning strategy. I have divided my port into long term holds, about 50%, and covered calls, the other 50%.

Download the option chains for all the stocks in my covered call inventory (about so 50 stocks currently but working on 200 more) after looking at their six month charts to exclude stocks in down trends and checking their earnings report date. Earning reports are dangerous, uncertain dates!

Upload the selected option chains to my Covered Call Selector.

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I tighten the parameters until only a handful of the best stocks remain. These I transfer to a spreadsheet to reduce the number of options to match the available capital for buying the required round lots (100 shares) per option. One of these days I’ll add this functionality to my web app. It exists partially, it works well enough when the number of chains to pick from is low.

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This is all done before the market opens. Easy in Portugal where the market opens ar 2:30 PM. In the US I would do it half an hour after the market closes (to let the CBOE update the chains to the closing prices - 15 minutes delayed).

Once the market opens, buy the shares and sell the calls. Of course, by the time the market opens prices have changed and one has to adjust to the current reality. Typically buy the shares at market and place limit orders to sell the calls.

One needs these tools for best results. Each option chain can have hundreds of options, with 50 stock candidates it’s well over 5000 options one has to choose from. One needs to pick less than one per thousand.

In other words, this is not the standard options strategy. For the standard, you might read

The Captain

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All I know I2L is do your own due diligence just like the rest of us. You are leaning in hard on some of us to figure it out. We have feet of clay. I want zero liability for any of what you do. Any and all advise to you I completely take back, contradict etc…you should put on complete ignore. Do your own thing. Understand?

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