Sunday, March 27, 2011

Stock market bubble: Are we gonna party like it's 1999?

Is the stock market once again in bubble formation?

Bubble formation? That would imply dizzying heights and froth. It would suggest frenzied price action and stocks with little revenue (if any) and no earnings trading at huge multiples of sales or multiples of some other contrived metrics.

If we were in bubble formation there would be stock analysts who on a daily basis would be falling over each other to reiterate or initiate coverage on stocks with buy recommendations and newly raised price targets. Numbers that could not actually be justified but that investors and traders were more than happy to believe in. Analysts, some of whom were the rock stars of the day.

I was a trader back in the 1996-2000 NASDQ market when the daily range of the stocks like Yahoo and Ebay and others that no longer even exist could be 40 points or more. Then the next day they would do it all over again. It was a tech bubble that had a very unhappy ending.

It was a market that had bailed traders out from badly timed entry points and where buying dips had never disappointed. It then, however, suddenly turned into a demon where buying dips and waiting to get bailed out could become a career ending strategy.

For anyone who follows the stock market today or who has money invested there in 401K's or IRA's, the general feeling right now would be that while the markets have traded well off the lows hit during the height of the financial crisis, things still aren't all that great.

That's why it may come as some surprise that for companies prepared to go public the technology sector may be back in bubble formation, only this time with new names. Names like Facebook and Twitter have replaced Microsoft and Cisco. These companies possess valuations that appear to be in nosebleed territory, driven by huge amounts of investable cash and speculation. Deja vu all over again.

Round and round it goes, and where it stops...

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