EC The Biggest Bubble In History: Breakouts, Valuations, Bitcoin, Liquidity

Stocks have reached what looks like a permanently high plateau – Economist Irving Fisher, October 1929

Men think in herds; they go mad in herds and only recover their senses slowly and one by one – Charley McKay, Extraordinary Popular Delusions and The Madness of Crowds

2020 represents the complete triumph of liquidity over fundamentals – Matt King, Citigroup, 2021 Outlook

(The photo to the right is of an infamous book published on September 20, 1999, during the raging days of the Dot Com mania, calling for Dow 36,000 when the Dow was currently trading around 11,000).

Despite the meager performance of the indexes yesterday (S&P +0.18% Nasdaq +0.50% Russell -0.36%), a number of important stocks broke out to new highs or from ranges that had been constraining them. Let’s start with Amazon (AMZN, market cap $1.66 trillion) which was up 2.4% on average volume yesterday (Chart Source: Rob Moreno Twitter, Wednesday December 16, 1:24pm).

(Click on image to enlarge)

This is obviously a bullish technical development, as we included a chart from JC Parets of All Star Charts yesterday of AMZN coiling and said that which way it broke would have important implications for overall market direction (see Section 4: “Mega Caps Lagging”, Top Gun Financial, Wednesday December 16).

The problem is that the move was not based on any news and only further stretches the stocks gap between price and intrinsic value as AMZN is trading at 95x trailing 12 month EPS of $34.15. I don’t care how good its growth prospects are: 95x is absurd!

Another important stock to break out was Shopify (SHOP, market cap $145 billion), up 7.75% on 2x average volume also on no news (Chart Source: Rob Moreno Twitter, Wednesday December 16, 8:58am).

(Click on image to enlarge)

Again, the gap between price and intrinsic value is being stretched beyond absurdity with SHOP trading at 413x trailing 12 month EPS of $2.80. 413x! No comment required.

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Tin Man 4 weeks ago Member's comment

My problem with this is how to play it. Long puts are probably best but generally too expensive. I wish I could buy fractions of an option contract.

Alexa Graham 4 weeks ago Member's comment

Good idea. There's still no way to do that?

Moon Kil Woong 1 month ago Contributor's comment

Bitcoin may be headed to uncharted territory as replication comes to an end. Who pays for transactions then? Bitcoin will itself become more restrictive in multiplying than gold or any currency. This may lead to more cryptos being made which tends to cause their prices to drop because it is a synthetic/substitute depreciation that is happening to all crypto currencies. And it's already expensive with few people using it for exchange undermining its use as a currency.

That said, dollar devaluation will still happen, pushing up all assets that don't depreciate.

William K. 1 month ago Member's comment

When the bubble pops? Of course it is going to deflate, but will it pop or just fizzle? And I can't believe that it will only hurt share holders. I am sure that there will be plenty of pain for those not involved, and probably it is the non-participants who will suffer the most. Of course that 1% may lose the most money, but if one has 100mn and loses $90 mn, the $10mn is still quite enough to live comfortably, even if they do need to sell that second Learjet. But when that bubble, created by other with the help of the fed, bursts, or just fizzles, my losses will be a much larger portion, and my pain will be quite real. AND, for those who caused it all, know that I will be very unhappy.

Terry Caruso 1 month ago Member's comment

Good read, thanks.