I've been pounding the table that stocks have entered
"bubble-mode" for months now. All the generalized signs are there,
- Investor sentiment creeping back to 2007 levels
- The eight week average insider "sell to buy" ratio at late
July 2007 levels
- Stocks overextended, overvalued, and overbought
However, finding a distinct metric that PROVES you're in a
bubble is not so easy. Fortunately, Bill King of the
has already done it for all of us. Bill's been actively trading or
running trading groups for various Wall Street institutions for
over 30 years, so when he has something to say, I listen:
… There is now a bubble in the Russell 2000 and the Small
Cap Index. Both indices have more than doubled in the past 13
months - since the end-of-the world lows of March 9, 21009.
The March 9, 2009 Russell 2000 intraday low is 342.57. The
Russell 2000 hit 686.95 on March 17, 2010. On Friday it closed
No major index has double in 13 months since the Nasdaq
doubled from June 1999 to the end of 1999, the only time it did
so. It was the greatest stock bubble in US history. The Russell
had never doubled within 13 months in its history back to 1978.
The DJIA has doubled within 13 months only once. The DJIA
doubled from February 1928 to September 1929
As Bill points out, a market doubling within 13 months is a
definite sign of a bubble.
This has only happened once for the Nasdaq (the Tech Bubble) and
once for the DJIA (the Pre-1929 Crash rally) in the last 100
It is now happening in the Russell 2000:
As you can see, small cap stocks have recently gone into
hyperdrive, shooting up 100+ points since mid-February 2010 alone.
At one point I think we even had something like 20 straight up days
for the index (similar to the Nasdaq in 1999).
Investing in a bubble is a dangerous exercise. True, you can
make some fast gains in the process, but you always need to keep
one eye on the exits. If you're looking to invest in this index,
you can buy the Russell 2000 ETF (
) or consider some of the
Royce Mutual Funds
. The Royces have been specializing in small cap investing for well
over 30 years and are some of the best in the business.
However, be forewarned that smallcaps ARE in a bubble and
that ALL bubbles end badly. So if you choose to get some exposure
here, make sure you've got tight stop losses and an exit strategy
Do not simply invest blindly.
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