Some bubble stocks starting to get killed


I just read the heading on this post and realized that I wasn’t being politically correct.  I’m really sorry I used the word “killed.” I hope that doesn’t encourage anyone out there to go get a gun and start shooting people. I’d hate to feel responsible for anyone innocently reading this blog and then suddenly becoming inspired to go out and get a gun and start shooting  just because I so carelessly chose a bad word. I’ll really try harder to do the right thing.

It’s really hard to believe that CNN had to apologize for a guest using the word “cross-hairs.” Didn’t they have a show called “Crossfire?” I wonder how many shootings were caused by people becoming violent when they saw the listing for that show in their TV Guide? Don’t both parties use the term “battleground states?” And John Boehner won’t refer to the health care bill as “job killing” and changed it to something a bit tamer. I think the latest version is “job crushing,” but maybe that’s even too harsh. Maybe not. I didn’t see him cry when he said it. The politically correct thought police really must think we’re a bunch of morons. Because one crazy person decided to go on a shooting rampage we now have to change our language, just like millions of us now have to take off our shoes at airports because of one crazy passenger. I suppose Microsoft will have to take out the bullet points feature from their Word software. Some mild secretary might become crazed and violent when she’s typing a letter and asked to put in bullet points.

Back to the markets. The above chart of F5 Networks is not a stock I trade, but thought it was interesting to show how quickly a bubble can pop. This stock was around $18 a couple of years ago, and recently went as high as $145. When a story is well known and all investors pile on an overcrowded bandwagon, the rush for the exit can become a stampede. Certainly a lot of money can be made riding the trend. It is difficult to know when the trend starts to accelerate only for the sake of itself, rather than future prospects based on fundamentals. There are many stocks that seem to be in this situation. It’s amazing to watch talking heads on the financial news shows that suggest these bubbles still have a long way to go, and try to justify their valuations, even calling them fairly priced as their price charts have gone parabolic. When the stock inevitably breaks down the talking heads, along with chat rooms, bulletin boards, and other market commentators suddenly stop talking about yesterday’s stock and are off chasing the next bubble. I’ve felt gold and silver have been in that bubble territory for some time, and there are finally signs that the trend, at least this phase of it, is tiring. I do feel the fundamentals in gold are sound and that the long term bull market is still intact. It just needs to shake off the momentum traders and build a new base for the next leg of bull market.

But how to determine when to get off the bandwagon prior to the bubble bursting is the difficult question with no clear answer. I think technical analysis can be a great help. In the case of the above chart there is clearly an over-bought condition from the double stochastic indicator in the sub-graph. It turned down from over-bought territory prior to the big gap down. However, looking back at the chart over the past couple of years would reveal similar over-bought reading, even with divergences, that did not call a top, with the indicator turning back up and the market going ever higher. But when a market or stock accelerates in a parabolic fashion it is best to not get greedy and to let someone else get the last bit of the move. The above chart even had a double top that would suggest that the parabolic move might be ending. Another thing to gauge is sentiment, which of course is quite subjective. When sentiment is all of one opinion, the opposite opinion is probably the side to start thinking about, especially if the trend is just feeding on itself.

I read an interesting article in the Wall Street Journal last week. I know it is now this week. I’m a little behind in my reading. Anyway, the article talks about how the U.S. is losing ground on economic freedom. You coulda fooled me. According to this article the U.S. is now ranked number 9, right behind Denmark, if you can believe that. I’m surprised it is not ranked lower. With the desires of many on the progressive left who view France as the model we should follow it would seem we would be much lower on the list. France actually came in at number 64. I suppose if the Hollywood left had their way, with their love of Castro and Chavez, we would be much nearer the bottom. In fact Venezuela came in at number 175, with Cuba a close second at number 177. Only Zimbabwe and North Korea were below that, at number 178 and 179 respectively. I wonder if Michael Moore and Sean Penn would give up their millions, their careers, and all their possessions if the U.S. would adopt the kind of government they seem to want for the rest of us. It’s a dumb question. The answer is obvious.

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