Saturday , 13 August 2022

Deploy This Exit System To Make Sure You’ve Sold Out Before the Bubble Bursts

…Bubbles can continue to inflate for months or years after they are first identified and we are now in the most overpriced market in history, bar none. It can, and probably will, go higher as the speculative juices of investors cause them to continue to buy equities with little regard for valuations or market history. [That being said,] investing while in a bubble requires defensive tactics and I deploy a system that ensures that I will be out of the market when the bubble finally bursts. Let me explain.

How overvalued are we?

As the below chart from Jill Mislinski at dshort shows, we are now officially in a stock market bubble. We could be in the early stages or the late stages, but it’s a valuation bubble, nonetheless.

According to Ms. Mislinski:

  • “The peak in 2000 marked an unprecedented 129% overshooting of the trend – substantially above the overshoot in 1929.
  • At the beginning of December 2020, it was 154% above trend.
  • The major troughs of the past saw declines in excess of 50% below the trend.
  • If the current S&P 500 were sitting squarely on the regression, it would be at the 1457 level.”

How do you invest in a stock market bubble?

First, it’s reasonable to assume that our current bubble will continue to inflate, but it’s unknowable how far it may go. Therefore, I’m advising clients to stay invested for now…

Investing while in a bubble requires defensive tactics…I, for example, use a moving average crossover system that tracks the short-, intermediate-, and long-term moving averages.

  • When short-, intermediate- and long-term MAs turn negative, I raise some cash which ensures that I will be out of the market when the bubble finally bursts.
  • The downside is that I will probably give up some of the upside (but not much) if the market continues to rocket higher.

Here’s what my MA strategy looks like:

As of today, January 22, all three MAs are positive, which means my clients who use this system are 100% long equities. When the bubble bursts, this strategy will have moved them to 100% cash or bonds before the big down arrives. (This strategy returned 26% in 2020, vs. 16.6% for the S&P 500)…

Final Thoughts

In a bubble market the game begins to resemble Musical Chairs. When the music stops, who will have a chair and who will leave the game.

  • The True Believers will continue to buy every dip in the market. They have made lots of money thus far but, at some point, there will be a “Come to Jesus” moment when they realize that the game is over – that the bubble has burst and everyone around them is headed for the exits – and they will suffer significant losses, due to their stubborn clinging to the ever-expanding bubble myth.

Having a well-constructed exit plan in place can save you 20%-50% of your invested wealth. Hire a CFP, hire an financial advisor or hire an investing coach but don’t play musical chairs with your nest egg!

Editor’s Note:  The original article by Erik Conley, has been edited ([ ]) and abridged (…) above for the sake of clarity and brevity to ensure a fast and easy read.  The authors’ views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article.  Furthermore, the views, conclusions and any recommendations offered in this article are not to be construed as an endorsement of such by the editor. Also note that this complete paragraph must be included in any re-posting to avoid copyright infringement.

Related Articles from the munKNEE Vault

1. The 5 Stages of a Bubble – Where Are We Now? (+18K Views)

In this article we review the characteristics and different stages of a bubble, present some recent asset price bubbles, and identify current conditions which match up with traditional bubble criteria.

2. STAGES OF A FINANCIAL BUBBLE – Where Are We Now? (+2K Views)

If you believe this time is different and you can’t see how over-valued the Dow Index is based upon the MACD technical, then maybe it might be prudent to allow a Doctor to take a Cat-Scan to find out if you have any brains left in your head!

3. Financial Bubbles & Manias: What You Need To Know

Financial bubbles, crises, and flash-crashes aren’t an everyday occurrence but have been happening at a frequent enough rate in recent years that market participants should have familiarity with them. This article does just that.

4. An Analysis of Bubbles, Bubblers, Bubble Beliefs, Bubblenomics & Bursting Bubbles (+2K Views)

The benefits of being able to detect a bubble, when you are in its midst, rather than after it bursts, is that you may be able to protect yourself from its consequences. [Below are possible] mechanisms to detect bubbles [and insights as to] how well they work:

5. Financial Bubbles: Don’t Fall Victim To the Hype Of “the next big thing”

The following infographic details how some of the biggest financial bubbles in history have formed and then burst. Check it out to make sure you don’t fall victim to the hype of “the next big thing.”

6. Bubble Alert! Prepare NOW Before the Carnage Hits (+2K Views)

The market is now officially in the largest bubble relative to the economy in history according to the stock market capitalization to GDP ratio, which, incidentally, is Warren Buffett’s favorite means of valuing stock.

7. We’re In A Bubble! It’s Time to Take Profits, Increase Your Cash Position or Buy Some Protection

A bubble is the state of a market before the crash. It is a situation in which assets trade at a price that is considerably higher than their intrinsic value and, in my view we’re currently in a bubble. The current S&P 500 P/E is at 25.09 (when the historical average is 15.61). The question is, “When will the market crash?” and I see worrying signs that this could happen soon.

8. Stocks Are In a Bubble By Virtually Every Reasonable Metric

While CNBC and other perma-bulls claim that the stock market is a great investment today, the smart money is already prepping for a disaster. Goldman Sachs has told its clients to “sell at the new high.” Credit Suisse just told its clients stocks “haven’t looked this worrisome since the tech bubble.” They’re correct. Stocks are in a bubble by virtually every reasonable metric.

9. Biggest Speculative Bubble Ever Will Begin To Implode This Autumn. Got Gold? (+3K Views)

This coming autumn we are likely to experience the beginning of the end to the biggest speculative bubble in world history. All bubble assets will implode and the financial system will come under massive pressure.

10. When the Bubble Bursts It Will Cause Deflation & Drive Widespread Social Unrest – Here’s Why (+2K Views)

Should we be concerned when tepid economic growth and low inflation are accompanied by increasing public and private debt? Are we borrowing just to stay alive? [As I see it,] national governments will increase national debt loads in order to stay in power until one or more of them default. Then their will be financial panic which will most certainly be deflationary. Here’s why.

A Few Last Words: 

  • Click the “Like” button at the top of the page if you found this article a worthwhile read as this will help us provide more articles of interest to you.
  • Comment below to share your opinion or perspective with other readers and possibly exchange views with them.
  • Register to receive our free Market Intelligence Report newsletter  (sample here) in the top right hand corner of this page.
  • Join us on Facebook to be automatically advised of the latest articles posted and to comment on any of them.

munKNEE should be in everybody’s inbox and MONEY in everybody’s wallet! has joined to provide you with individual company research articles and specific stock recommendations in addition to munKNEE’s more general informative articles on the economy, the markets, and gold, silver, psychedelic drug stock and cannabis investing.
Check out eResearch. If you like what you see then…