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The Three Rules For Getting Out of Bubble Stocks


Identifying bubbles and having an exit plan can save you a fortune.


Greetings from New York where here, and throughout the country, a big to-do is being made over the Commodities Futures Trading Commission confessing that "speculation" may have had something to do with last year's spike in oil.

This replaces the notion that BRIC demand drove oil to a high of $147 prior to a December low of $33, a price from which crude has since doubled. To suspect traders may have had something to do with a quintuple in oil, followed by a dramatic crash, is akin to issuing a report that extended, unprotected exposure to heat and direct sunlight may have had something to do with an Irishman's 2nd degree sunburn.

The answer to the "Investigation," which I'd like to think cost the taxpayer absolutely nothing, solves the enormous mystery of how the BRIC bubble was absolutely no different than the scores of bubbles that dot our trading past.

Off the top of my head and sticking to the United States, in the last 150-odd years, we've had a railroad bubble, a car company bubble, a bubble in most anything during the 1920's, an Internet Bubble and a BRIC bubble. They all hurt like crazy to recover from, but none of them brought down the Republic. They just killed or gutted, in the case of Auto's in the 1920's, companies such as: Hudson, Nash, Willys-Overland and Maxwell.

Other companies that crashed with the bubble but fought back were names such as General Motors (GM) and RCA which lost 97% from 1929's high of $114 to slightly under $3 per share in 1932. So, from 1924 to 1929 RCA rose more than 10-fold and fell 97% from 1929 to 1932.

I'm going to go out on a limb and suggest that some of that move was driven by speculation. It's cute to think of our great grandparents wearing high-waisted pants with spats, chugging bootleg hooch and trading whatever they heard Joe Kennedy et al were getting long. But if you think we've evolved in a meaningful way in the 80 years since, pull up a chart of Potash (POT), Petrobras (PBR) or US Steel (X) (now, once again, smaller than the Mob). Here, I'll do all three for you:

Click here to enlarge.

US Steel in black, though red would be more fitting for those who bought 300% higher. Potash in bright blue and Petrobras sporting gold, much like the gold chains investors bought themselves a year ago and hung themselves with by Thanksgiving.

Need more suspiciously spiking price action? Let's look at an era I traded through first hand: The Internet Bubble!

Click here to enlarge.

Infospace (INSP) in black, Yahoo (YHOO) in blue, and the NASDAQ itself in gold from June of 1999 through September of 2001. Don't let the excessive nature of Infospace distract you from the fact that Yahoo rose 200% from June to the end of 2000 and the NASDAQ doubled before falling about 30% of it's levels in mid-99."

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No positions in stocks mentioned.

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