Bubble talk is bubbling up

One of the silliest tropes when it comes to markets is that we can't be in a bubble if everyone thinks we're in a bubble. That's garbage. Most of the time, the idea that markets are bubbly is foremost in investors' minds. They just think that they will be able to sell to a greater fool.

Currently, there has been a lot of talk about bubbles; ergo we're not in one. This is one of those places where investors try to get cute about being contrarian, and it's easily disproven.

News articles about stock market bubble

Over the past 4 weeks, articles mentioning "bubble" have averaged about 0.9% of stories in the Bloomberg database of sources. The only time this was higher was April 2000. Clearly, investors were cognizant of the likelihood we were in a bubble at the time, and yet that didn't prevent it.

When the 4-week average of these articles was more than 0.45% of the total, the S&P 500 returned an annualized +3.0%, but when there were relatively few "bubble" articles, that return jumped to +27.1%. The more that investors thought that they were in a bubble, the worse that forward returns were. Knee-jerk contrarianism would have us believe the opposite.

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We also looked at:

  • Annualized returns when "bubble" articles are high vs. low
  • While Main Street articles focus on bubbles, Main Street ones are near-depression levels
  • Our Macro Index has turned higher
  • Using sentiment models as trend-following tools

The post titled Bubble talk is bubbling up was originally published as on SentimenTrader.com on 2020-10-05.

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