The Bubble of Bearishness Bursts

Editor's note: Mike O'Rourke is chief market strategist for BTIG. His primary focus is identifying short-term catalysts driving daily trading activity and addressing how they fit into the "big picture." This is his first column for TheStreet.com.

Most market observers are widely familiar with the premise that bubbles are formed in an environment of perfect or near-perfect fundamentals.

In those perfect fundamental environments, the bullish mindset is an easy sell. It makes perfect logical sense. Missing a bull market often appears foolish, and betting against one appears even more foolish. In a world in which fiduciaries are expected to be "prudent," making a decision that contradicts logic (even if only in the short term) is a challenge.

Instead, the fundamental strength of a bull market provides logic behind an investment that makes participating in the frenzy a much easier decision. As the idea is popularized, the upward trend in prices becomes self-validating. Eventually, the frenzy creates a valuation issue in which the prices paid for the asset far outstrip the future fundamental prospects. ...