Things like Robinhood (HOOD) and Virgin Galactic (SPCE) got rightfully hammered, while the market as a whole continued to rise.<\/p>\n
These were two “hype profit” recommendations<\/a> we made recently. Both hit our downside targets. In the case of SPCE, we published the essay after the stock already came down 10% on July 15 and still felt confident enough to call for an additional 40% decline.<\/p>\n Looks rational to me…<\/p>\n The fact that blatant hype gets punished in this market should point to the fact that maybe we’re not in an overarching<\/em> bubble, even though some areas of the market are clearly there.<\/p>\n So, what actually is <\/em>a bubble?<\/p>\n One of the best definitions I’ve seen comes from Richard Bernstein, founder of RBA advisors… and a pioneer of market segmentation indicators for all you data nerds (like myself) out there…<\/p>\n He stated:<\/p>\n When I used to teach at the NYU\/Stern Graduate Business School, we’d cover what determines a financial bubble. Based on my readings of financial history, I came up with five characteristics of a financial bubble. Portions<\/em><\/strong> of the current market are exhibiting all 5 characteristics.<\/p>\n The five characteristics are:<\/p>\n I remember sitting in that class, amazed at this neat little checklist. Looking back, it’s probably why I’m always skeptical when others get overly excited…<\/p>\n In the excerpt above I emphasized “portions” because it’s a nuance most bears miss.<\/p>\n Painting the market with broad negative strokes is just a bad approach. Consistently missing out on great opportunities is just as bad losing money on hyped investments like HOOD and SPCE. Both are due to a major flaw in “judgement” and a complete misunderstanding of what moves markets.<\/p>\n The best rendition describing this type of “permabear” mentality I’ve heard comes from our friends over at Casey Research<\/a>:<\/p>\n If the market is sky-high, it’s a bubble – stocks must fall.<\/p>\n If the market is high but not sky-high, it’s overvalued – stocks must fall.<\/p>\n If the market is on the way up after a crash, it’s a rebound in a secular bear market (don’t ask!), and it couldn’t possibly last – stocks must fall.<\/p>\n And if the market has just crashed, well, it’s just the beginning of a bigger crash – stocks must fall.<\/p>\n In the perma-bear’s mind, stocks are never ever cheap enough.<\/p>\n<\/blockquote>\n I must admit, the essay got me thinking, “am I one of these bearish creatures?”<\/p>\n After all, the skeptical mind can easily fall victim to the permabear mentality. I say all this because as the market is taking a “breathtaking” step back from highs, many are calling for a crash…<\/p>\n “Valuations are too damn high!” cry the bears.<\/p>\n For the most part, that’s true relative to historic standards…<\/p>\n But then that logic should force them to buy value… where valuations in the energy sector run for about 12-15 times next year’s earnings. Reasonable, especially when looking at historical averages. <\/p>\n\n
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