A bubble with more room to inflate

We have been saying it for a while but it would seem that now it’s officially a bubble, according to a survey of retail stock investors; before I cause any panic, this does not necessarily mean it’s time to get out and go home. For starters, this ‘bubble’ very specifically relates to US tech and nothing else.

On top of that, the response from retail investors is not what you might expect. It turns out that this is a bubble they don’t want to miss out on. It might sell off eventually, but before it does, the bubble could keep inflating and that means there is money to be made. Everyone gets FOMO (fear of missing out) from time to time and stocks are no different. One could argue that it’s easier to take a loss as stocks go down than it is to see stocks go up and not be involved.

This sentiment can be a strong driver in increasing prices further. We have said on many occasions to be weary of the bubble, but missing out on making money in a bubble creates a conundrum that every trader must face. Get in and hope you get out before it drops, or don’t get in at all. This decision, is another reason why you should ‘autotrade’ the professionals. Having been a trader for 20 years, I’ve been here many times. There is no right or wrong answer until after the fact. Just be cautious, and diversify your portfolio.

On The Portfolio Platform we’ve seen a real shift in stock holdings recently as most move out of growth stocks and into longer term value. That’s not to say it’s time to give up on tech, but most of the big movers over the last year have given up some ground and sold off a fair bit in recent weeks. A solid portfolio should have a mix of growth and value, and every now and then, one will take a hit, but over the longer term, it’s the smart way to go.

Many traders have seen their strategies underperform recently as the tech pullback began, some were still in and got a little burnt, some were out and missed the last rally. Nobody ever picks the highs, and often it drops before a trader will take profit and look elsewhere for future earnings. Many of these same stocks made us a lot of money this year, so it has to be taken as par for the course that a little is given back at some point. No stocks go up in a straight line.

So, while 75% of retail investors believe there are signs of a bubble, at the same time, bullish sentiment has increased, rising to pre-pandemic levels at 61%. One signal it might be time to get out, the other to get in!

“Optimism grew as the market hit new all-time highs, vaccines increased, stimulus measures continued, and earnings estimates are high,” said Mike Loewengart, Chief Investment Officer at the E*Trade Financial.

Stocks have been on a tear for more than a year, and bubble warnings have rung out during most of that time. But the latest leg up has stretched valuations to levels last seen in the dot-com era, and with yields surging, the chorus has grown so loud retail investors have taken note. But most ignore it -- just as they’ve done every other time a banker has said they are wrong -- betting that there’s money to be made as long as the government’s spending and the Federal Reserve is keeping policy loose.

They’ve consistently bought when the pros shied away and made early bets on stocks that will benefit most from a return to normal economic activity. For the last 12 months, they’ve ploughed an average of $1.2 billion into stocks daily, according to data from VandaTrack.

In some circles, the relentless buying by individual investors is stoking concern that the group is poised to pull back, creating a risk to the broader market. The equity allocation of U.S. households rose to about 40% in April, surpassing the dot-com peak and reaching the highest level since the early 1950s, according to an estimate from JPMorgan Chase & Co.

At various times over the past year, the retail frenzy has spurred concerns from professional investors, including ourselves at The Portfolio Platform, who warned that their involvement, similarly to the early 2000’s, signified too much euphoria. But they’ve not shied away yet. At Bank of America Corp., individuals were net buyers of stocks for a sixth straight week, according to the firm’s latest data on client funds. That contrasts with professional investors who took advantage of recent gains to offload holdings.

The answer is almost certainly to not ‘put all your eggs in one basket’. Europe still offers long term value and if you don’t already have a European based strategy in your portfolio, maybe look at European Stock Basket which is already up by 28.3% on the year, or Cambridge Futures which made 21% last month. These are trades based in markets with a significantly lower CAPE ratio to the US and still have room to move higher.

Investing comes with risk, we know this. All investors learn this eventually one way or another. But give yourself the best possible chance by following experienced traders. Build a diversified portfolio on The Portfolio Platform and let the experts work for you.


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