Enough With the Bubble Talk

NEW YORK (TheStreet) -- Can we just stop with the bubble talk? Please!

It's getting old seeing headline after headline online and on TV about how equities are in a bubble.

3D printing? Bubble. 

Solar stocks? Bubble.

Social media? Bubble. 


Enough is enough. Perhaps the Federal Reserve's asset printing could cause one to question a bubble in liquid assets. But purely based off of traditional metrics such as valuation, the claim to a bubble is asinine. 

Now that the market has declined for a few sessions, the talk is quieting -- for now. But that hasn't stopped writers and investors alike from making the Nasdaq's highest close in 13 years a far bigger deal than it ought to be. The companies pushing the index higher are some of the most profitable in the world, a much different scenario than Nasdaq's last stint above 4,000. 

And I'm sick of hearing about the Google (GOOG) references too. Just because the general investing public Googles the term "bubble" doesn't mean we're actually in one. If "Armageddon" was being searched frequently, it wouldn't indicate that the world would be ending soon, would it?

Don't get me wrong, I'm not making a case saying that equities are cheap. Stocks are fairly to fully valued as it stands. Should the global economy kick it up another notch, then earnings multiples should expand and equities would continue to rise, and vice versa. 

But looking for the correction based on a bubble is ludicrous. It's like the guys who drew a horizontal line from the peaks in 2000 and 2007, over to the soon-to-be-new all-time highs in 2013. Some argued that we were forming a "triple top" and would soon encounter a huge decline as a result. 

Seriously? I know it was months ago that this happened, but what's the premise? Why would the stock market decline just because it hit similar heights made years ago? Technically it makes sense, but fundamentally it's a whole new ballgame. In 2000, we had the tech bubble, and in 2007, we had the credit crisis. What's the bear case for 2013's supposed collapse? (Hint: There isn't one). 

That's exactly my point with calling today's price action a bubble. Just because the Nasdaq hits its highest point in 13 years doesn't constitute it as a bubble, even though there was an actual bubble the last time it hit 4,000 on its rapid rise to 5,000. 

That my friends, was a true bubble. Here's a chart of the Nasdaq over the past 15 years or so, just to show what a true bubble looks like, (on the far left), and a non-bubble on the far right:

^IXIC Chart

^IXIC data by YCharts

While still steep, one can quickly decipher the price appreciation on the right side of the chart as being much more gradual than the rocket ship-like price action on the left side.

To each their own though, I suppose. If investors want to speculate that we're in a bubble, then go ahead and short the market. 

But rest assured, the market is not in a bubble. Eric D. Nelson, CEO of Servo Wealth Management, had this to say regarding the market's valuation in November: 

"For the recent ten-year period, investment returns have been healthy despite the debilitating setback in 2008. The US Total Stock Index earned almost 8% per year [from Nov. 2003 to Oct. 2013]. But this is far from an alarming rise in prices, as the average over the previous 75 years was 1.7% higher, at +9.6% per year. So far, so good. If lower-than-average returns have created a market bubble, that would certainly be the first time."

Regarding the valuation of the S&P 500 , an excerpt from a FactSet Research report is below:

"The forward 12-month P/E ratio for the S&P 500 now stands at 15.0, based on yesterday's closing price (1790.62) and forward 12-month EPS estimate ($119.26). This is the highest forward 12-month P/E ratio logged by the S&P 500 in more than four years (September 2009)."

"On the one hand, the index is now trading above both the 5-year (13.0) and 10-year (14.0) average P/E ratios. On the other hand, it is still trading below the 15-year average P/E ratio (16.2), and is not close to the peak P/E ratio of 25 recorded in the late 1990's and early 2000's." 

There is, however, some concern, such as the record levels of margin debt at the New York Stock Exchange. Margin is great, until it's not. One foul swoop lower in the overall markets and investors who have their accounts levered to the tilt are forced to liquidate their long positions, adding even more downward pressure to the markets.

Equities, though, aren't overvalued and over-owned at current levels. The term "bubble" is easy to throw around any time we have a strong bull market, such as we've had this year.

It's only when the market is hitting truly insane, unimaginable levels that might mean we're in a bubble. Levels that force investors to say, this is so completely idiotic and stupid, but I have to buy. 

When everyone is talking about how much money they make day trading stocks of companies that have no business being a public company -- or even a company, period -- then there might be a bubble on our hands.

Does it mean today's market can't go down from current levels? Of course not. It's only healthy for a bull market to have corrections and pullbacks along the way. And a deep correction from this point wouldn't prove that we were in a bubble. A decline is expected, but no one truly knows when it will happen.

I'm not arguing that we can't decline, but one thing's for certain folks: This is not a bubble.

-- Written by Bret Kenwell in Petoskey, Mich.

Bret Kenwell currently writes, blogs and also contributes to Robert Weinstein's Weekly Options Newsletter. Focuses on short-to-intermediate-term trading opportunities that can be exposed via options. He prefers to use debit trades on momentum setups and credit trades on support/resistance setups. He also focuses on building long-term wealth by searching for consistent, quality dividend paying companies and long-term growth companies. He considers himself the surfer, not the wave, in relation to the market and himself. He has no allegiance to either the bull side or the bear side.

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