This is a syndicated repost published with the permission of oftwominds-Charles Hugh Smith. To view original, click here. Opinions herein are not those of the Wall Street Examiner or Lee Adler. Reposting does not imply endorsement. The information presented is for educational or entertainment purposes and is not individual investment advice.
Those who lived through the last two speculative blow-off tops know the impossibility of predicting the final top.
How can we tell if stocks are in the final blow-off stage of a bubble? There are four basic give-aways:
Amazon is a large, well-run corporation, but its core businesses are low-margin (as for the cloud business–everybody and their brother is ramping up their cloud biz). Is it truly normal for a low-margin company’s stock to rise 50+% in four months?
Margin debt reflects the “animal spirits” of speculation and confidence. When borrowed money is used to buy more stocks, it makes the resulting rise vulnerable to a decline that forces recent buyers to liquidate their positions to cover their margin calls.
The soaring confidence in future advances that define blow-off tops is visible in declining measures of volatility such as the VIX and VXX. (Recall that volatility and stocks are on a see-saw; should the VXX reverse and move higher, stocks would plummet.)
One last method to identify blow-off tops is to look for repeating patterns that marked previous blow-off tops.
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