Good morning, traders.

Jeff here.

I’ve said it before and I’ll say it again — we’re in a mania-driven market bubble. 

Bubbles occur when asset prices far exceed their intrinsic value, driven by exuberant market behavior. 

Traders simply love to get bullish on speculative sectors. 

Think the dot-com era, the great financial crisis, the GameStop Corp. (NYSE: GME) short squeeze … the list goes on.

2024 brought a new hot sector dominating the market — artificial intelligence (AI).

And over the past six weeks, the post-election Trump Trade has broadened the bubble, causing massive Ponzi-flavored surges in crypto stocks, quantum computing names, software, and rocketship stocks.

But yesterday afternoon, the major indexes went into a bearish tailspin as the Federal Reserve cut rates by a quarter point — while also signaling plans to slow the pace of rate cuts moving forward:

Is this bubble finally bursting, or will this dip be bought? We’ll have to wait and see. Don’t take your eyes off the market right now. 

But if you’re still not convinced that we’re in a bubble, here are six reasons why we are…

Exponential Price Increases

One of the most obvious signs of a speculative bubble is when the price of an asset class increases rapidly within a short period, without a corresponding increase in its fundamental value.

If you think this hasn’t happened recently, let’s look at some examples:

• MicroStrategy Inc. (NASDAQ: MSTR) is up 437% YTD
• Palantir Technologies Inc. (NASDAQ: PLTR) is up 347% YTD
• Robinhood Markets Inc. (NASDAQ: HOOD) is up 208% YTD
• Nvidia Corporation (NASDAQ: NVDA) is up 173% YTD

The only one of these companies that has incredible earnings to back up the share price is NVDA, and it’s still way overextended.

And when share prices get this far away from reality, the market is usually in bubble territory…

Increased Leverage

The use of borrowed money to invest in assets — also known as leverage — can amplify returns…

But it can also increase overall risk in the market.

An increase in leverage is a sign that investors are becoming overconfident and taking on more risk, often a feature of asset bubbles.

One way to judge leverage in the market is to track how many people are buying options…

Unsurprisingly, global futures and options volume hit a record 137 billion contracts in 2023.

Market Euphoria

A general sense of irrational exuberance and optimism in the market, where traders believe that prices can only go up, can indicate a bubble.

Reddit posts asking questions like “Will Stocks Go Up Forever?” are perfect examples of this problem. 

It’s hard to know when market euphoria is reaching a peak, and trying to call the top is a fool’s errand.

But every major asset bubble showcases this phenomenon — and we’re seeing it everywhere in this market environment. 

Media Coverage and Public Participation

When an asset class starts receiving widespread media attention, it may indicate that the bubble attracts a broad base of participants, including those who might not fully understand the risks.

This has been supported by recent data showing that a record share of U.S. households now own stocks.

And now, it’s even worse with crypto, as everyone and their grandma scrambles to get in at ridiculously high prices. 

That means when the bubble bursts, the ripple effect following a potential drop in asset prices could be much more painful and widespread than it has been historically. 

Sector Concentration

Asset bubbles are often concentrated in specific sectors.

An excessive focus on one sector, with prices rising much faster than in others, can be a sign of a bubble.

This is exactly what happened during the dot-com bubble. Every company on the planet started adding “.com” to its name, causing the share price to surge.

Sound familiar? AI has been the sector for the majority of the year. 

Now, I’m noticing a similar situation with the “Magnificent 7.” If it wasn’t for these seven names, the major indexes would be languishing in mediocrity.

But now, we’re starting to see a major correction forming. 

With the indexes so concentrated, that’s all it will take to tank the entire market.

And this might be happening right now…

Tuesday’s sell-off was the most significant we’ve seen in some time, and this could be the beginning of the bubble popping.

Don’t take your eyes off the market, be extremely careful with your positioning, and stay tuned for my Burn Notice and GAMMA plays this week.

With volatility finally ramping back up, and prices hitting levels we haven’t seen in weeks (or months), we could see some incredible trading opportunities soon. 

Stay safe out there,

Jeff Zananiri

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