Good morning, tradersā¦
Jeff here.
You need to hear thisā¦
The first market you trade will likely shape large parts of your trading psychology.
On the one hand: If you started trading in 2022, you may have developed more bearish tendencies. As interest rates rose, the bearishness in the market was seemingly unstoppable, causing a 19% drop in the S&P 500.
On the other hand: If you started trading in 2023, you may have developed a bullish slant. I wouldnāt blame you. The market had been absolutely ripping, and you wouldāve done very well staying bullish and holding long throughout the year.
And now, if youāve started trading in 2024 ā the market youāre in is a doozy.
On the macroeconomic front ā the book is cooked, so to speak. The Federal Reserve wants to cut interest rates, but inflation is stubborn (as we can see through risk-asset inflation in the market).
The Fed has always chosen to take the path that buoys stocks over the one that helps regular people, nothing new thereā¦
But what all this means is CRUCIAL.
With this market bubble growing bigger, frothier, and greedier ā the pop is sure to comeā¦
Now, as we find ourselves amid another meme stock mania, itās more important than ever to understand how to navigate hype in the market.
With that in mind, let me tell you how this phenomenon has affected me (and how itās playing into the current market environment)ā¦
My First Market: The Dot-Com Bubble
I started trading over 25 years ago, in 1998.
Two years later, the stock market saw its biggest crash since the Great Depression, the aftermath of āthe dot-com bubble.ā
In other words, my trading journey began amidst one of the most bearish periods in market history.
That era is tattooed in my brain ā it had a major influence on my overall trading personality.
When I worked on the sell side at Bear Stearns at the time, part of my job was to broker IPOs to clients.
Iāll never forget listening to the pitch for one IPO company called theGlobe.comā¦
I immediately knew the CEO was inflating the prospects and that the company was worthless. But that didnāt stop the stock from debutingā¦
On Friday, November 13, 1998, theGlobe.com issued its IPO. The stock’s target share price was initially set at $9ā¦
Then, the first trades hit the tape ā¦ at $87.
The price continued to climb as high as $97 before closing at $63.50.
At the end of the trading day, the company had set a record for IPOs with a 606% increase over the initial share price.
Guess what happened a few months after thatā¦
As investors grew increasingly skeptical of the bubble, theGlobe.com saw its share price drop from a high of $97 to less than 10 cents.
By 2001, the company was worth a measly $4 million market cap, down 95% from its highs.
This is just one example, but this sort of thing happened over and over again during my first few years of active trading.
Seeing some of the worldās most respected investors blow their funds up ā and some of the most hotly-anticipated IPOs go up in smoke ā shaped certain parts of my trading mindset.
And these days, Iām getting a serious case of dĆ©jĆ vuā¦
Is This the 2024 Version of the Dot-Com Bubble?
Iām seeing a lot of parallels between the dot-com bubble and the current euphoria around artificial intelligence (AI) and, now, meme stocksā¦
Companies that arguably have nothing to do with AI are starting to add āAIā into their names, just like companies started adding ā.comā in the early 2000s.
How many dot-com era runners are still around, dominating the tech industry?
Not many.
The few that have survived are some of the most powerful companies on the planet (think Amazon, Apple, Microsoft, etc.) ā a far cry from their long-bankrupt counterparts.
In hindsight, it may seem obvious, but it wouldāve been incredibly difficult to identify the winners amid a gigantic sea of dot-com losers at that time.
The internet certainly turned out to be worth the hype, but most of the companies that were trying to capitalize on itā¦failed.
And thatās where we are currently in the AI surgeā¦
Tons of companies pretend to be āthe next big thing,ā while only a select few will actually accomplish it.
This era will definitely provide some excellent trading opportunitiesā¦
But whatever you do, donāt allow yourself to get caught up in the hypeā¦
What the āMeme Stock Hypeā is Telling Usā¦
Speaking of hype, the current euphoria surrounding meme stocks is another cherry on top of this frothy market.
During this weekās Tuesday Market Outlook, I cautioned you to avoid going long (or buying calls) on meme stocks, which have (unsurprisingly) gotten destroyed since I issued that warningā¦
However, I donāt expect the meme stock resurgence to die out after three days.
In fact, I think we can expect to see a ānew meme stockā nearly every week now as traders chase the dragon.
The āAI tradeā is no longer moving the needle for these degenerates.
Nvidia Corporation (NASDAQ: NVDA) being up 40% on the year looks like peanuts compared to 130% overnight gains in AMC Entertainment Holdings Inc. (NYSE: AMC).
But Iām more interested in what this meme stock move is foreshadowingā¦
Donāt forget: The original GME short squeeze occurred near the end of a major overall market rally.
Itās like my friend Tim Sykes often says, āRide the hype, donāt buy the hype.ā
NOTE: The current environment is nowhere near as ridiculous as the early 2000s, and Iām not predicting a historic market crash. But itās still important to be skeptical of any āmeme stockā or āAI technologyā company without cold, hard evidence.
Thereās a lot of hype out there right now.
Shrink the game, stay disciplined, and trade cautiously.
Happy trading,
Jeff Zananiri
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