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It is likely that the

S&P 500 Technology Hardware, Storage & Peripherals Index

is threatened with bursting in a bubble

This is the conclusion I draw from a study by three Harvard University researchers: Robin Greenwood, professor of finance and banking, chair of the institute’s Behavioral Finance and Financial Stability project; Andrei Shleifer, economics professor; and Yang You, a PhD Candidate In their study “Bubbles for Fama”, which was published in the January 2019 issue of the Journal of Financial Economics, they analyzed US. Stock market history to 1926 looking for ways to predict a bubble that was about to burst

Using the formula derived by the researchers, I expect an 80% probability that the Index for Technology Hardware and Storage & Peripherals will be 40% lower in the next two years than it is today among the better known companies in this one Industry belong

Apple

(Ticker: AAPL),

Seagate technology

(STX) and

Western Digital

(WDC)

While no other industry meets researchers’ definition of a bubble, two others come close. They also work in technology: semiconductors and semiconductor equipment, and software

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Why should you focus on an industry that may be in a bubble rather than the market as a whole? Prof Greenwood told Barron that from their study of the history of bubbles, he and his colleagues learned that “rarely are market-wide” events. Far more often, he said, a bubble manifests itself in certain pockets of the market even when other sectors remain undervalued

This was certainly the case at the top of the dotcom bubble, the mother of all bubbles Greenwood reminds us that other sectors of the market – especially value stocks – despite a surge in dotcom stocks in the late 1990s and early 2000s – especially value stocks – either fairly valued or even undervalued. Some of these other sectors actually gained ground during the bear market that accompanied the bursting of the dot-com bubble stocks

The researchers define a bubble as an industry with a two-year return at least 100 percentage points above that of the market as a whole.This is a high standard indeed – out of all industries for which performance data was available between 1926 and 2016, met during this period of 90 years at any point in time only 40 the definition

Of course, not all bubbles burst and those that do not always burst Here, too, the researchers set a strict requirement: As soon as an industry had fulfilled its definition of a bubble, they considered it to have burst if it had at least 40% within the following two years. Lost Their Value Of the 40 industries that met the researchers’ definition of a bubble, 21 burst – or 53% –

What it means if the future is like the past: There is a slightly better than one of two odds that an industry that outperforms the market by 100 percentage points in a two-year period will lose 40% or more over time following two years

The researchers also looked at how the likelihood of a crash changed if they tightened or loosened their definition of a bubble.If the criterion was set only 50 percentage points ahead of the market instead of 100 percentage points, the likelihood of a crash dropped to just 20 percent When they tightened the criterion to 150 percentage points, the probability of a crash rose to 80%

This latter probability applies to the Technology Technology, Storage & Peripherals index for the past two years, according to FactSet, it has exceeded expectations

S&P 500

by 151 percentage points

One is tempted to apply the professors’ formula to individual securities, as I have done myself in the past.In November 2017, for example, using the formula I argued that the probability of a Bitcoin crash is more than 80% it lost 67% in the next 12 months I again used the professors’ formula in February 2020 to argue that the odds of

Tesla

(TSLA) crashes were 80%. The stock lost 59% over the next six weeks

Since then, Tesla and Bitcoin have naturally skyrocketed, as have a number of other soaring assets. Should I re-predict the chances of a crash are high, I asked Greenwood? He declined, stressing that further research is needed on the various factors that influence the likelihood of a stock crash

Still, he added that he believes that not only is the broader stock market overvalued, but there are also individual pockets of the market that are “incredibly frothy and bubbly” ”

Mark Hulbert is a regular contributor to Barron His Hulbert Ratings Track Investment newsletters that pay a flat fee for the review. He can be reached at mark @ hulbertratings.com

It is likely that the & Peripherals index for S&P 500 technology hardware and memory is in a bubble that is at risk of bursting

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Stock market today

World news – USA – This is where the real stock market bubble is located

Source: https://www.barrons.com/articles/this-is-where-the-real-stock-market-bubble-is-51613388601