Is This a Blow-Off Top? Four Ways to Tell
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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Are you like me? Ever since my first summer job decades ago, I've been chasing financial security. Not win-the-lottery, Bill Gates riches (although it would be nice!), but simply a feeling of financial control. I want my financial worries to if not disappear at least be manageable and comprehensible.
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Gordon Long and I discuss The New Nature of Work: Jobs, Occupations & Careers(25 minutes, YouTube)
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