The Magic of Bubbles – But You Don’t Have a Wand

FredericMarsanne

Earlier this morning I was pouring a glass of milk and for some reason there were tons of bubbles in it. Well, not tons. It’s air after all! But that got me thinking…

There are so many types of bubbles. Come to think of it, they’re everywhere. The danger is we really hardly notice them. Do you dive? I’ll see the shark roaming around the delicious fresh meat that I am, not the multitude of bubbles in the water that are as many proofs that I am alive – yes, I am still breathing.

Liquid bubbles. Soap bubbles. Stellar-wind bubbles – yeah, in case you’re wondering, these are large cavities that a star's energy creates in the interstellar space. Bubble wrap. Champagne. Superbubbles. Mephedrone – it’s a synthetic stimulant – not that I ever tried. They’re everywhere. It’s an invasion!!!

And the list goes on. Dot.com bubble. The dot itself is a bubble sort of, isn’t it? Real-estate bubble. Tulip bubble. Chinese-equity bubble. Chinese-property bubble. When does it stop? 

Everywhere. Only I couldn’t see them until just about now for some reason. Finally, I am aware. It’s about time. And all of a sudden I realize how my life, our lives – yes, I’m talking about us, dear – is running on thin air…

So I rushed to that old masterpiece of a booklet by John Kenneth Galbraith, “A Short History of Financial Euphoria.” The book itself feels like a bubble somehow. So light you hardly feel you’ve read anything by the time you’re done indulging.  

110 pages. That’s it! Who does not have the time for such a jewel? I enjoyed it. It’s so entertaining! I can’t seem to remember the main point it’s nearly, how shall I say, elusive. It’s just too fun for its own good.

But make no mistake about it. It really weighs a ton. The book reviews the great speculative episodes of the past three centuries or so. They show common denominators. Galbraith comments, “This is of no slight practical importance; recognizing them, the sensible person or institution is or should be warned. And perhaps some will be. But (…) the chances are not great, for built into the speculative episode is the euphoria, the mass escape from reality, that excludes any serious contemplation of the true nature of what is taking place.” Rings true, doesn’t it?

Fueling this euphoria, Galbraith continues, are two key devilish ingredients – first, financial amnesia or, as he put it, “the brevity of financial memory.” Financial collapses get forgotten fast. Come a new bubble a few decades or even years later, a youthful and self-confident generation hails the circumstances that create it as a breakthrough, which Galbraith also refer to as “a brilliantly innovative discovery.” The second is the widely held belief that the more money an individual is endowed with, the more intelligent he or she is. In short, the more moula, the more brains. If someone makes money buying this, they’re smart. My turn then to buy it…

Continues Galbraith, “Uniformly in all such events there is the thought that there is something new in the world. (…) In the 17^th century it was the arrival of the tulips in Western Europe (…) Later it was the seeming wonders of the joint-stock company (…)” Yesterday it was the Internet.

What will it be next? Biotechs with no revenue and no earnings? Drones are pretty light, aren’t they? Do they qualify as bubbles?

Take a company like Ambarella (AMBA). Fabulous firm. Great technology. Super-fast grower. Its system-on-a-chip designs HD video processing, image/audio processing and system functions onto a single chip, delivering gorgeous video and image. 

Ambarella flies high on drones. The notion of drones with high-definition cameras roaming the skies is a bit perplexing or mind-buggling, but clearly investors are taking flight on the idea big time. AMBA started to trade at around $6 in October 2012 and shares are now worth more than $120. It’s a 20-bagger!

Shall I buy and hope for another 20-bagger from here like so many frenzied folks? AMBArassing I even hesitate.

Remember, though. A great company does not necessarily make for a great investment if you overpay.

The magic of bubbles... Just don’t forget you investor may not have a wand!

Read More on Funanc1al Blog 

Price Channels – Bollinger Band

The price of a share fluctuates (no kidding!) and may at times evolve in a channel, that is, until it decides not to (you never know when it will decide not to – good luck with that!) This is why many traders, full of hope (others call it illusions or superstition) favor technical indicators that highlight the market’s channel-like movement, at least until they again realize that these efforts may at some point turn out useless.

John Bollinger has given his name to one of the most popular technical indicators, the Bollinger Band, which can play the guitar. The BB (some also call it the bee or the baby) now serves as a standard overlay for many technical traders. <b>z35W7z4v9z8w</b>
 

Image source: google.com

Here is how they say it works. You plot a moving average of the past N periods. Then, calculate the standard deviation of the past N periods. To get the upper band, displace the moving average upwards by a multiple of the standard deviation (often two). For the lower band, displace the moving average lower by the same distance. Optionally, you can compute the square root of the diameter of the triangle that a woman’s breast may inspire you to draw as you beau linger (this is the origin of Bollinger, right there; got it?) and contemplate so much beauty. Of course, if you’re a woman, you are welcome to contemplate the breast of a handsome man.

When prices hit the upper Bollinger Band, the stock is deemed overbought, sending a sell signal; conversely, when they hit the lower band, the stock is oversold, triggering a buy signal. In a strong uptrend, prices usually fluctuate between the upper band and the moving average. A crossing below the moving average may then warn of a trend reversal to the downside, also thought of as reversion to the mean and... Beware overshooting! (Do not use guns during this process.)

Image source: google.com

There are of course a whole bunch of other indexes including the relative strength index, the commodity channel index, the average directional index, the Donchian channel and Keltner Channel, the Kilimandjaro Vexation Climb, the Rhino Elephantine Biffurcation gauge. Not to mention the Trader’s Stress Therapeutics Tetrapode Token and the Bear/Bull ZooLead ratio. But these require a level of expertise that only the fiercest of traders will be in a position to leverage. Disregard for now. It’s just too much to handle at this juncture.

OF COURSE, ALL THE RULES ABOVE CONSTITUTE A FRAMEWORK THAT THE SHREWD TRADER WILL TRANSCEND.

The interpretation rules above look simple and mechanical. But they are merely guidelines. In fact, if you apply them mechanically, you will not make money. No, nothing. Zip.
Thus it is most critical to:

•  Not follow the rules above if you don’t feel like it.
•  Grasp the market context in which they work; often the best way of doing this is by (please fill out as you deem appropriate).
•  Learn to read price action together with technical indicators to complete your learning. If you don’t know how to do this, ask one of us at FUNanc!al when we’re back from vacation.
•  Not forget that there are underlying assets. Say a company’s share. What do the top and bottom lines look like? And other annoying questions regarding the fundamentals of a business... Is the CEO pretty or handsome? Married? And so forth.
•  Learn from the masters who really if you think about it don’t really day trade at all, so food for thought right there.
• Combine indicators to form a rounded perspective that amounts to probably not much but who knows?

Image courtesy: google.com

ADD VOLUME INDICATORS INTO THE MIX

Any price movement gains additional significance if it occurs in high volume. When you’re in a mood for it, add in volume indicators for another dimension of analysis. By volume we don’t mean for you to modulate your voice as you sing along the Bollinger Band.

Image courtesy: google.com

You may think twice before using the information above for day trading. Are some of the richest men on Earth day traders? No. Remember: Warren Buffett is a long-term investor. George Soros and Carl Icahn may place more speculative bets, but they don’t usually day trade. How many Forbes 1000 billionaires are day traders? None. But there are plenty of investors and entrepreneurs who are long stocks big time. Microsoft fan Bill Gates built a fortune by holding onto his shares. You don’t see Facebook king Mark Zuckerberg day trade, do you? Warren Buffett’s favorite timeframe: hold forever! Don’t day trade, invest.