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A Look at the Perilous Psychology of Financial Bubbles

Investors acknowledge a market bubble but optimism prevents them from seeking financial safety

by Bob Stokes
Updated: September 18, 2020

The months before the 2000 and 2007 stock market peaks saw a measurable rise in news stories that used the phrase "financial bubble."

But instead of selling, many investors kept right on buying.

The logic went something like this: "This bubble could burst one day -- but not just yet."

The March 2008 Elliott Wave Financial Forecast showed this chart and said:

AftertheBoom

The bars on the chart show that the number of financial bubble articles boomed as the bear market began in 2000. When the mania re-ignited, the bubble talk receded briefly, only to re-emerge last year [2007] as the housing crash started to bite and the credit market imploded. The... bubble of 2003-2007 should be over, because bubble references are once again rising fast.

Indeed, the worst of the 2008-2009 stock market debacle was just ahead.

Fast forward to 2020 and this Sept. 7 news item from CNBC:

"We're certainly in a bubble,' strategist warns -- but don't expect it to pop anytime soon

Is it rational to stay in the market, even after acknowledging something as potentially financially dangerous as a bubble?

Here's a classic quote from an Elliott Wave Theorist:

The case for rational bubbles rests on the idea that investors are consciously making risk assessments and deciding that the gamble of buying high -- to sell even higher -- is worth it. But a bubble is fueled by more buying, which is propelled by new buyers and by increased conviction among those already invested, so few bubble investors actually do sell higher. Instead of buying high and selling higher, most of them do only the first half.

You deserve an independent perspective on financial markets, and Elliott wave analysis can bring you just that.

See what our analysts see -- so you can prepare your portfolio for what they expect next for stocks, bonds, the U.S. dollar, gold, silver and more.

Does Keeping Up with Stock Market "Fundamentals" Ever Matter?

The daily information flow is too vast for any one investor to follow. Yet here's the good news:

Even if you could consume all market-related news ...

... You don't need to. Indeed, to base your investment decisions on "fundamentals" is counter-productive.

Why?

Contrary to popular belief, the stock market's trend is not governed by the Fed's policy decisions, earnings, economic data, politics, trade wars or any other "news."

It's governed by investor psychology, as reflected by the Elliott wave model.

Find out what our Elliott wave experts are saying to subscribers, so you can position your portfolio for the dramatic changes that our analysts see just ahead.

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Bitcoin's $1300 Rally Defied the 1-2 Punch of Bearish Fundamentals. Here's Why

Bitcoin wasn't supposed to rally in October, or so said media reports. Yet the real cause of bitcoin's price action is NOT the news. It's the psychology of investors, which reflects clear Elliott wave patterns directly on price charts. See it for yourself.