Wednesday, March 19, 2014

Phase Three of a Bull Market - The Euphoria Phase

Finally, it feels good. Most of the experts that were decidedly bearish during Phase 2 have now changed their minds and are spouting the virtues of this investment class. As the media gets on board with this new idea and starts to believe in it themselves they tend to interview the few remaining "kill-joy" analysts that still think this investment is a bad idea less and less often giving the public an even more biased view that this investment is "it". Finally after all these years of searching- mankind has found the perfect investment vehicle. This is now the "must have" investment and how people get rich.

The public invests in this vehicle en masse bidding up the prices higher and higher accelerating the gains making the investment that much more exciting for everyone else that has not fully invested yet. However, when the majority of investors have joined the party then a problem starts to occur. There aren't enough new investors bidding up the price of this asset to keep the price rising as quickly-so it starts to slow down. Sometimes bull markets end with a bang sometimes they carve a long arc on the chart as they top out and start to head down. This is where the "Bear slides down the slope of hope". Keep in mind that in phase 3 most everyone is completely convinced that this investment is almost infallible. Even as the market starts down people are sure that it is just a temporary setback and stay invested, often times adding to their positions. An example of this mentality is at the end of the Dot-com bubble in March of 2000. Both individual investors and also the large investment houses were so convinced that we had indeed entered a "new paradigm" that they just could not admit to themselves that the party was over. They kept "hoping" it would come back. Many of them rode the market down, wiping out much of their wealth.

- Source, Mike Maloney's