The Case For A Stock Market Bubble: 'Speculation Pervading Society'

The SPDR S&P 500 ETF Trust SPY has more than doubled off its 2020 pandemic lows, and the S&P 500’s valuation is looking extremely stretched based on a number of traditional stock market valuation metrics.

Stansberry Research lead editor Dan Ferris recently discussed the extremes in investor sentiment in today’s market and how he believes it's an obvious red flag and warning sign of a stock market bubble.

Irrational Exuberance: One of the textbook signs of a market bubble is when stock market speculation extends beyond Wall Street and becomes commonplace among average Americans. Ferris said that’s exactly what he’s witnessed with the rise of meme stock speculation as the latest trend on social media since the beginning of the pandemic.

“There's simply no way this is anything other than a bubble,” Ferris wrote. “Democratization of the market... speculation pervading society... or whatever else you want to call it... it's clear that individual investors are wielding power they haven't had since the height of the dot-com bubble.”

Ferris isn't alone in pointing out that meme stock mania in GameStop Corp. GME, AMC Entertainment Holdings Inc AMC and other high-risk stocks isn't a good sign for the health of the stock market.

Related Link: Unprofitable Companies Are Flooding The Market With Stock Offerings: What Does It Mean?

Trouble Ahead? Back in January, Robert Shiller, Nobel Prize-winning economist and author of the book “Irrational Exuberance,” said the attitude behind the Reddit-fueled Wall Street counterculture movement is similar to the attitude driving Trumpism in America.

“There is a pass-it-on mentality. A sense that ‘those experts are just self-important; they don’t know anything,’” Shiller said. “I can imagine that story being contagious at this time in history. It’s going to be extra humiliating when the bubble pops.”

Historical Perspective: Of course, up to this point, the meme stock traders have had the last laugh, and Ferris admits he has felt like a fool for pointing out the absurdity of investing in struggling companies like AMC and GameStop.

“Yet, as foolish as it may seem to the vast, hyper-bullish, hyper-optimistic, and at least temporarily wealthy herd of individual investors, I'm still bearish on the overall stock market,” Ferris wrote.

With the S&P 500 priced at about 3 times sales, or about 30% higher than its dot com bubble peak, Ferris said he will continue to be bearish on the S&P 500 in the longer term until the market corrects by at least 30%.

Benzinga’s Take: Meme stock traders that bought heading into 2021 and held on to today have certainly made a killing so far, but the bad thing about bubbles is that the majority of investors tend to come in late. GameStop and AMC are up 766% and 1,560% in 2021, respectively. Unfortunately, GameStop is down 20% and AMC is down 35% since the beginning of July.