The phrase 'stock market bubble' does not have a standard definition but the current market is the closest we have been to a bubble since the internet frenzy in 1999-2000.
For over two months now, market players have been struggling with a market that has gone almost straight up in the face of a major crisis and crumbling economic statistics unlike anything any current market players have ever seen. The straight-up action is primarily justified as being a function of massive fiscal and monetary stimulus, underinvested market participants, and excessive pessimism.
Whatever the explanations might be there is a widespread belief that that action is not justified and can't last much longer. However, it continues to run and every day more market players are throwing in the towel and jumping into stocks since they feel they have no choice.
The uptrending, V-shaped, action isn't that unusual. We have had several instances of it in since the Great Recession but the magnitude of this move is record-setting. That makes the action feel bubble-like but what really drives the comparison to 1999-2000 is the small-cap speculation that is taking place.
On Thursday, the major indices had their highest volume in years. High volume is usually a sign of institutional accumulation but that was not the case this time. The stocks that helped to create the volume are 'junk' names and are primarily being attracted by amateur traders that are playing the action.
There is a list of small-cap names that are trading tremendous volume. Not all of them are as bad as LK and HTZ but the movement in those names is helping to drive action in groups like airlines and cruise ships that have suffered badly.
This small-cap speculation is the same type of sentiment that existed back in 2000, but in some ways it is even worse as it comes during a time when the economy is much worse. Back in 2000, the liquidity was driven in part by concerns about the Y2K issue but the liquidity now is much greater and the economy much worse.
Some market players may object to the description 'bubble' but all the aspects of one are here.
So how do we deal with this? First, we have to be very aware that there is no easy way to time action like this. It has already lasted far longer and gone much further than many thought possible and it can easily continue. What we have to do is continue to stay vigilant and watch for a change in the action. If you are so inclined to play the small-cap speculation, just make sure that you stay disciplined and manage risk. The potential for increased volatility is very high and it is easy to get caught by surprise.
The May jobs reports is due out this morning at 8.30 am ET and we will see if there is any reaction to that. I don't expect much more than a few short term jiggles. Fundamentals and economic issues simply do not matter right now and until that changes the speculative bulls are in control.