Is the Stock Market Really About to Pop? Why One 'Bubble' Legend Says No

Filed under: Stocks, Stock Markets, Historical Stock Prices, Investing

As the stock market continues its amazing run into record territory, it seems as if every day there's a new expert calling for a top -- often comparing the current state of the market to that of the late '90s, right before the Internet bubble popped. However, Dan Zanger, arguably the most successful investor during that period, disagrees.

"There is certainly some frothy behavior, with many stocks overpriced, while others are priced to perfection, " says Zanger. "However, this market is far from the 'bubble' behavior that we saw in 1998-2000."

Zanger knows what he's talking about, having cut his teeth in the markets, with various degrees of success, in the early '90s. But it wasn't until he became a student of William O'Neil's CAN SLIM method, which looks for stocks with strong fundamentals and technically significant chart patterns, that he catapulted to the rarefied heights of the investing world.

Beginning in June of 1998, Zanger spent 18 months turning $10,775 into $18 million -- an unofficial world record for stock market investing -- which translates into a mind-blowing 164,000 percent return (and yes, he has the tax returns to prove it). Just five months later, as the bubble was getting ready to burst, that same account had grown to a massive $42 million dollars, a feat that Trader Monthly ranked among its 20 Greatest Trades of All Time.

Because of his unique experience, Zanger sees significant differences between the current market and the one he operated in during the bubble.

"Price movement in this market is nowhere near what we witnessed in the late '90s," he says. "Back then, you had stocks doubling in two days and some tripling in just five days. Most days, though, you were more likely to see many stocks running up $25 to $75 or stocks like Amazon going from $327 to $600 on the day of a 3-for-1 split. Today we see very few splits, and stocks are not racing up. It would be more accurate to say they are melting up slowly."

As impressive as his returns were during the bubble years, perhaps even more impressive is the fact that when the market crashed, unlike other high-flying investors who lost everything, Zanger saw the warning signs and was able to emerge from the carnage with a good chunk of his fortune intact. So what signs would he look for to determine if the market is nearing the end of a bubble phase?

"Well, excessive price-to-earnings ratios would be a good sign, for one," he says. "For example, the S&P 500 (^GPSC) trading above a price-to-earnings ratio of 25 and stocks racing up in a manner similar to what we just saw with Twitter would qualify. This stock has behaved very much like an Internet stock from the bubble years, going from $41 to $75 in just a few weeks. But as I mentioned before, this same price action would more typically have happened in just a few days during a true bubble like 1998-2000."

In the years since the bubble burst, Zanger has remained involved in the markets, investing his own money and running Chartpattern.com, where he interacts with other investors on a regular basis, helping to teach them the rules and strategies that made him successful. And as for the chances of another true bubble in the markets, Zanger's skeptical -- at least in the short term.

"Much of a bubble's behavior is rooted in herd mentality and fueled by a new set of rookie investors who believe the market will never go down," he says. "I think there are far too many people today who remember the bubble bursting in 2000, so I doubt there are enough people with an undeniable belief in the market -- something that would be needed to make a bubble happen again. At least I hope that's the case."

No man is an island, or even a peninsula, so I encourage you to give me your feedback in the comments below. I also want to hear what other topics you'd like me to write about, so please let me know either by connecting with me on Twitter, or via email.

 

Permalink | Email this | Linking Blogs | Comments