To The Moon

[Heart]Hello Tigers,

Is the US market curently a Carnival Before the Bubble Bursts or a "Baby Bubble"?[Allin]

On September 25, the three major U.S. stock indices closed lower for the third consecutive day: the $Dow Jones(.DJI)$ fell 0.38%, erasing all gains since the Federal Reserve signaled a "50bp rate cut" on September 18; the $S&P 500(.SPX)$ dropped another 0.5%, with a cumulative 1.8% decline over three days; and the $NASDAQ 100(NDX)$ also fell 0.5%, showing obvious short-term pressure.

Latest Valuation Check-Up: Big-3 Indexes & Mag-7 at a Glance:

Read more on >>🤔Market is Expensive? A Glance of MAG 7 ’s P/E Ratio in 5 yrs

I. Three Core Triggers for the Three-Day Losing Streak

1. Powell’s "Bubble Pricking": On September 23, he explicitly stated that "stock market valuations are quite high," which was seen as an oral cooling signal from the Fed. Historical data shows that after a Fed Chair names excessive asset prices, the broader market typically corrects by 5%-7% on average within three months.

2. "Too Good" Economic Data Turns Negative: The preliminary September Markit Manufacturing PMI hit 54.2 (an 18-month high) and weekly initial jobless claims were below expectations. This pushed the probability of a 25bp rate cut in November down sharply from 74% to 49%, with the "Magnificent Seven" tech stocks falling 1.6% on average.

3. Trump’s "Government Shutdown Threat": He called for a federal government shutdown if spending cuts are not approved by October 1. During the 35-day 2018-2019 shutdown, the $S&P 500(.SPX)$ fell 12%, and now sectors like defense and infrastructure are pricing in this political risk early.

II. Valuation Debate: A Repeat of 1929 or a "Baby Bubble"?

Despite short-term corrections, U.S. stocks have still posted solid year-to-date gains:

$S&P 500(.SPX)$ up ~12.29%, $NASDAQ(.IXIC)$ up ~15.92%, and $Dow Jones(.DJI)$ up ~12.58%.

However, views on valuations are sharply divided:

(1) Bears: Warn of a "1929-style Crash"

Mark Spitznagel, founder of black swan fund Universa Investments, warned that the S&P 500 may rise 20% to 8,000 points in the short term but could then plummet 80%. His logic includes: lingering liquidity boosting risk appetite, current "carnival" mirroring pre-1929 crash patterns, and record-high stock allocations by households and institutions.

1. Short-term liquidity remains abundant: The Fed’s rate cut cycle has not ended, which continues to boost short-term risk appetite. The $S&P 500(.SPX)$ has risen by more than 13% so far this year, and a further 20% increase is "realistically possible";

2. Historical signals have emerged: Before the 1929 crash, the average annualized return in the 12 months before the bear market started reached 26%, and the index even doubled before peaking. The current market's "doomsday carnival" highly aligns with this characteristic;

3. Valuations and positions are approaching extreme levels: Long-term low interest rates combined with fiscal bailouts have pushed market valuations to historical highs. The proportion of U.S. household stock allocations has exceeded the peak during the dot-com bubble, and institutional stock exposures have even hit a new high since November 2007.

(2) Bulls: It’s a "Baby Bubble"

@Tiger_James Ooi strategist at Tiger Brokers, argues that the $NASDAQ 100(NDX)$ has risen only 120% since the 2023 AI boom—far less than the 1,073% surge during the 1995-2000 dot-com bubble.

Valuations also support this: the $NASDAQ 100(NDX)$ ’s current P/E is 30.7x (vs. its 10-year high of 40x), and the $S&P 500(.SPX)$ ’s P/E is still below its 10-year peak.

Data as of September 25th

Data as of September 25th

$Bank of America(BAC)$ ’s Michael Hartnett agrees the bubble isn’t finished: studying 10 major equity manias since 1900, the average trough-to-peak gain is 244%, implying the Mag-7 still has room to run. Boom phases are narrow and explosive—tech rallied 61% in six months during 2000 while the rest of the $S&P 500(.SPX)$ fell; today’s market has yet to reach that “extreme split.”

Hartnett advises hedging with “distressed value” stocks, as prior bursts of mega-cap euphoria ultimately lifted the economy and sparked a catch-up rally in cheaper names.

III. Four Risks of a Bubble Burst (with Probabilities)

IV. Investor Responses: "Three Parachutes"

1. Institutional-style "Rebalancing": Trim 2% of holdings whenever the portfolio rises 5% to reset to target stock weights.

2. Option Hedging: Use Sell Put or Buy Put strategies to limit downside risk while holding long positions or call options.

3. Cross-asset Diversification: Allocate 20% of positions to short-duration high-yield bonds, gold, and undervalued non-U.S. markets (e.g., Japanese stocks, Hong Kong stocks, Latin American markets).

Risk Disclosure: This analysis is based on public market data and historical patterns, and does not constitute investment advice. Investors should make decisions based on their own risk tolerance.

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