Are We In A Stock Market Bubble?

In a recent tweet (here), political economist Robert Reich issued a "Wall Street Bubble Alert" referencing a Business Week article (here) in which Goldman Sachs claims that "...the market is at or above where it should be trading." The CNBC technical analysts, however, don't see it that way.

In the video above, technical analyst Michael Harris claims that "..from a trend-channel perspective, this is one of the most beautiful patterns I have seen in some time."

I've duplicated the "trend channel" (sometimes called a price channel) in my forecast at the beginning of the post. The graph of ^GSPC (the S&P 500 index) shows the actual index path (black line), the dynamic attractor path (dashed red line) and the upper and lower 98% bootstrap prediction intervals (dotted green line and dot-dash blue line, respectively). The "trend channel is presented as solid heavy red lines. My attractor forecast shows that the S&P 500 index is above the 98% bootstrap prediction interval and this may be the start of a stock market bubble. Whether we are in for another massive bubble, such as the one centered on 2000, remains to be seen.

Technical analysis focused on trend channels misses all this because the time period considered is restricted to the start of the last upswing. The trend channel, to be clear, is simply constructed by connecting peaks and troughs from the start of the last upswing. That's it. There's nothing more to the trend channel than plotting lines by hand. Since this kind of analysis is quite common on Wall Street, it may actually contribute to the development of a market bubble if it is believed by enough investors. If you follow this type of technical investing model, your dilemma will be "when to get out of the market," that is, when will the bubble burst. Trend channel analysis doesn't have much to say about that issue and neither does attractor analysis, which is saying right now to start selling since the S&P 500 is above the 98% upper bootstrap prediction interval.

It will be an interesting summer in the stock market!