In the last decade, many investors were left hanging as first the tech sector and then the housing/financial sector overheated and burned. Exchange traded funds (ETFs) can reflect these peaks and valleys. Wouldn’t it be nice if we could anticipate bubbles before they burst?
For the most part, it seems that policy makers, bankers and brokers claim that bubbles cannot be anticipated or spotted until they’ve burst, reports Brian Bloch of Investopedia. But according to Bloch, that is absolutely not true.
What exactly is a bubble? Simply put, a bubble is an overheated market that is created when too much demand pushes prices up significantly and quickly to unjustified levels. Eventually, investors realize that the prices they are paying are unsustainable and begin to sell out. Almost as quickly, the high demand for the bubble assets shifts to an oversupply and prices tumble. [Don’t Get Caught Without a Strategy.]
Bloch claims that there are always leading indicators of bubbles, although the strength of those indicators may vary. The clarity of the signs can range from t-shirts proclaiming stock market doomsdays to complex ratios that deviate from historical means. [A Sane Strategy in Irrational Markets.]
That’s why we utilize a 200-day moving average strategy to shelter investors from huge selloffs. When the market moves below the 200-day moving average, it’s a signal to sell, giving a little protection on the downside. [How to Put Risk Into Perspective.]
For more stories on trend following, visit our trend following category.
Sumin Kim contributed to this article.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.