VUG - QQQ Shows 6 Of The 7 Bubble Signs

2024-04-10 13:55:44 ET

Summary

• Ray Dalio's method for identifying bubbles includes a total of 7 signs.
• These signs have correlated well for the historical bubbles between 1929 and 2007.
• The Invesco QQQ Trust ETF is showing 6 of these signs in my view, including high valuations, broad bullish sentiment, and popping risks if tightening continues.

Ray Dalio’s method for identifying bubbles

In his book entitled Principles for Navigating Big Debt Crises , Bridgewater Associates founder Ray Dalio described a few signs that correlated well with past stock market bubbles. These signs are summarized in the table below and directly quoted below:

1. High Prices Relative to Traditional Measures: This means stock prices are significantly higher than what metrics like the P/E ratio suggest they should be.

2. Influx of New and Inexperienced Investors: When a lot of people new to investing jump in due to a hot market, it can be a sign of frothy conditions.

3. Widespread Bullish Sentiment: Everyone is overwhelmingly optimistic about the market, with little concern for potential downsides.

4. Unsustainable Growth Expectations: The market is anticipating unrealistically high future growth for companies, which can't be maintained indefinitely.

5. Debt-Fueled Buying: Investors are borrowing heavily to buy stocks, which can amplify a bubble and make a crash more severe.

6. Speculative Purchases: People are buying stocks not based on company fundamentals but because they expect prices to keep rising reg ardless.

7. Does tightening risk popping the bubble?

For further details see: