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A market bubble occurs when asset prices rise far beyond any reasonable valuation.

It is driven by speculation, emotion, and the belief that prices will continue rising indefinitely. 

For traders, the challenge is more about finding a way to manage a bubble, rather than just identifying that one exists.

By their very nature, bubbles can persist far longer than any logical analysis suggests. There are opportunities as they develop, but timing their peak is virtually impossible. 

Understanding their characteristics and having a systematic way of managing bubbles in your trading strategy is worth considering for any trader.

What is a Bubble?

Market bubbles have distinct features that separate them from normal bull markets or even overvalued conditions for a particular asset:

Dramatic Price Appreciation Disconnected From Fundamentals

In a bubble, traditional valuation metrics become meaningless. 

Company or asset fundamentals that usually matter to market participants are ignored in the hope of what might be.

Cash flow, profit margins, competitive positioning, and (in some cases) producing revenue may be dismissed. 

Widespread Participation And "This Time Is Different" Narratives

Bubbles require mass market participation. 

When every headline you see or article you read references "this time is different," or "the old rules don't apply anymore," it is a sign that the collective psychology has shifted from normal caution.

Social media may begin to explode with ever more frequent success stories, and for the individual trader, the fear of missing out becomes increasingly overwhelming.

Credit and Leverage Fuelling Demand

Bubbles are typically accompanied by easier credit conditions. 

When interest rates are lowered and investors are confident in general economic conditions, any spare cash is put to work.

In stock or other market bubbles, you may see retail traders maxing out credit cards to buy call options, with the put/call ratio becoming increasingly distorted.

This leverage often amplifies the rise and the eventual fall, making the risk even more acute and potentially damaging to trader capital.

Vertical Price Charts in Final Stages

One of the telltale signs of a bubble's final phase is a parabolic price chart.

Prices seem to go up daily, and every minor pullback is short-lived (creating more buying pressure). 

This is the euphoria stage. It is where the greatest danger is.

The fear of missing out on further moves is at its highest, and a logical willingness to take profit off the table diminishes in the minds of ever more excited traders.

New participants may continue to enter solely for the way the price is appreciating. Entering into the move only understanding that what they are buying is going up, so they want to join in too.

Bubble vs. Overvalued: Key Differences

Not every expensive market is a bubble. Several characteristics distinguish a bubble from a simpler and far less dangerous overvaluation:

Elevated Valuations With Reasoned Fundamental Justification

An overvalued market has stretched valuations, but can point to real supporting factors (at least to some degree). 

Examples include strong earnings growth, low interest rates, disruption in service or productivity, and providing genuine temporary value.

Even if prices respond to less obvious immediate influencing factors, such as international events, policy changes, and supply issues, the fact that some factors justify continued positive sentiment (even if somewhat unfulfilled) is a positive sign.

Linear or Steady Uptrend

Overvalued markets tend to grind higher with a more sustainable trend rather than a vertical spike. There are normal corrections along the way, even if the highs and lows of a fluctuation are higher. 

Reasonable Participation Levels

There is evidence of institutional investors buying on any dips, but common retracements last days or even weeks.

Retail participation exists but isn't frenzied and plastered all over social media every day or referenced in mainstream media consistently.

Some Scepticism Still Exists

There will be some legitimate and contrary opinions about valuations. Major financial media will present both bearish and bullish cases when a stock is discussed.

Trading Strategies for Potential Bubble Management

Here is the scenario: You bought early in the up move, you are now in profit, but some of the bubble signs are beginning to show up in your thinking.

Tiered Profit-Taking Strategies

Don't try to pick the top. As an alternative approach, begin to scale out systematically with partial closes. This will alleviate the potential for FOMO creeping in. 

You could stage this with set points, e.g. sell 30% when you've doubled, another 30% when you've tripled, 20% when conditions clearly show evidence of entering bubble territory and, having banked a substantial profit already, you keep the final 20% with a trailing stop for the final run if it happens.

Trailing Stops With Wider Bands to Accommodate Volatility

Let’s assume you see the merit in some form of trial stop. In bubble conditions, normal stop distances will get you whipsawed out. Use percentage-based trailing stops or ATR multiples with enough room to accommodate bigger intraday moves.

For example, if your norm is to trail your stop 1.5 x ATR behind price at the end of every candle, then in increasingly volatile conditions during a parabolic move, consider 2,5 x ATR to allow room to move while still offering protection against price collapse.

Reduce Position Sizing and Leverage

The temptation in bubbles is to maximise gains by increasing your margin and entering more and more positions in one asset. 

High leverage and significant single asset exposure in bubble conditions is a potential death sentence to trading capital. 

Recognising the added risks you are contemplating before entry is critical. Combining this with an approach that reduces position sizing and increases margin requirements is consistent with good trading practice as risk increases.

Planned and Rigid Exits

Before buying, you should have already made decisions on what exit approaches you should take and the parameters at which they will be executed, 

Having the exit plan as you enter can limit the chance of getting trapped by greed. Neglecting this and focusing on the opportunity alone can be disastrous.

Never Assume You Can Time the Top

It is usually a big mistake if you believe you will recognise the exact top and exit perfectly. Let’s be frank, even if you hit it lucky once, you won't be able to every time — no one does.

Recognise Behavioural Biases That May Affect Your Judgment

Bubbles can create powerful psychological forces.

Anchoring bias may mean that you fixate on peak prices. Confirmation bias makes you seek information supporting your bullish view and ignore opposing evidence. Recency bias makes you believe the recent trend will continue indefinitely. 

The indisputable key to any bias management is awareness and honesty that some markets may just not be for you (or if they are, to proceed with extreme and continuous caution).

Psychological Preparation for Rapid Reversals

Mentally rehearse the worst scenario and clarity of planned action, e.g., “if it drops 10% in three days, I will ….”.

Having thought through your response and armed with unambiguous exits in advance will make execution easier when emotions run high and begin to dominate. 

Final Thoughts

Extreme valuations, little fundamental underpinning, parabolic price action, and universal bullishness should be part of your bubble identification checklist and flag that your bubble action plan should be implemented.

If you are already in, or tempted to be so, then approach bubbles with honesty, awareness of your trading self and extraordinary discipline to follow through, as predicting what and when things may dramatically turn is close to impossible. 

Never forget you are not smarter than the market, but you can (potentially) be smarter than many traders by planning and doing the right thing.

Last week brought some relief as markets found support following the retreat from record highs... with the recent crypto crash being a notable exception.

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Bitcoin Breaks Below $100K

Crypto markets are under significant pressure after Bitcoin crashed through the psychological $100,000 level. Currently trading around $94,650, Bitcoin has fallen to its lowest point since May. The $94,000 level appears critical; if it fails, we could see Bitcoin slip back into the $80,000 range and potentially enter bear market territory.

Fed Minutes and Rate Cut Signals

The Federal Reserve minutes are due this week, and they could provide crucial insight into the timing of rate cuts in 2026. Markets have already priced in a likely December cut, but the January 2026 cut that was initially expected may be in jeopardy. Pay attention to the Fed speakers scheduled throughout the week—their comments could help clarify the path forward on monetary policy.

Strong Earnings Season Winds Down

We're in the final stretch of what's been an exceptionally strong earnings season, with 82% of companies beating EPS expectations and 76% surpassing revenue forecasts. This week features some heavyweight reports, most notably Nvidia reporting Wednesday after the bell. Major retailers Target and Walmart will cap things off, giving us a clear picture of consumer health heading into the holidays.

Market Insights

Watch Mike Smith's analysis for the week ahead in markets

Key Economic Events

‍Stay up to date with the upcoming economic events for the week.

The longest government shutdown in US history has finally ended after 42 long days.

After a month and a half of political theatre, seven Democrats and one independent broke ranks and voted with Republicans to pass a stopgap measure. The Senate went 60-40, the House followed 222-209, and Trump signed it hours later.

The legislation includes three-year appropriations for the Agriculture Department, FDA, military construction, veterans affairs, and congressional operations, along with restoration of pay for federal workers and reversal of Trump administration layoffs through January.

However, the most contentious issue, healthcare subsidies, has been kicked down the road to a December Senate vote.

COVID-era ACA subsidies expire at year-end. When they do, premiums for the average subsidised household will more than double from $888 to $1,904 per year, with an estimated 3.8 million people losing coverage entirely.

If the December vote fails, which is likely considering how far apart the two parties are on the topic, we could see a new shutdown begin in January.

What Happens Next?

This Week:

• Federal employees return to work.
• Paychecks start flowing again.
• SNAP benefits get restored for 42 million people, though heating assistance won't come back for weeks.
• National parks reopen.
• Airports start to go back to normal.

December:

• Senate votes on healthcare subsidies. It will probably fail.
• Premium notices continue to be sent showing 2026 costs doubling.

January 30:

• Government funding expires.
• We do this whole thing over, except now the healthcare subsidies have already expired.
• If Republicans and Democrats remain divided on budget priorities, another shutdown will likely begin.

By the Numbers:

Over the past 42 days, approximately 750,000 federal workers have been furloughed. Another two million worked without pay. Over 42 million had their food assistance delayed. And the FAA cut flights by 10% because air traffic controllers stopped showing up to work.

Further concern is the "data blackout" that has hampered Federal Reserve decision-making. Key economic indicators, including jobs reports, were suspended, leaving the Fed blind during an active rate-cutting cycle.

Meanwhile, separate analyses from Challenger, Gray & Christmas showed layoffs surged 183% in October, which would make it the worst October for jobs since 2003.

The Bottom Line

Today’s deal ended the shutdown, but it didn’t actually solve anything. The deal essentially kicks the can down the road to January while leaving the healthcare crisis unresolved.

With both parties divided on healthcare and spending priorities, and Trump lacking a comprehensive plan to address rising premiums and high deductibles, a resolution in the December vote seems unlikely.

If no compromise is accepted by the time Government funding expires on January 30, another shutdown is almost inevitable.

Impact of Australian Jobs Reports and U.S. Shutdown End on the Aussie