Investors Aren't Acting Like We're in a Bubble

Investors are still worried about an AI bubble...

After all, a bubble can't keep inflating forever. It can only end one way.

You see, a bubble happens when prices get completely divorced from reality. Investors fall for the "fear of missing out."

When there's no one left to buy, the bubble pops... And asset prices crash.

That's a bad outcome for everyone. But the good news is, investors aren't acting like the market is in a bubble.

Instead, folks recently sold stocks at one of the most aggressive rates in years.

Similar bouts of selling have led to big gains in the past. And that means you shouldn't be worried about a bubble just yet...

This Extreme Selling Is a Good Sign

We won't see a stock market bubble until folks start buying like crazy...

They get caught up in the excitement and buy indiscriminately.

That pushes valuations to crazy levels. Eventually, the whole thing unwinds. Buyers dry up... And prices crash.

Notice, though, the necessary first step for this whole situation... buying like crazy.

Every healthy boom begins this way. But that same bullish frenzy is also what turns the healthy boom into a dangerous bubble.

Importantly, folks aren't buying without caution today. It's the opposite... They recently sold stocks in a big way.

That's according to data from the Investment Company Institute ("ICI"). Each week, it tallies the total flows for exchange-traded funds ("ETFs") and mutual funds.

It's a real-money indicator. So instead of just looking at the general attitude toward stocks, it monitors the real change in fund flows on a weekly basis.

This ICI indicator shows that earlier this month, investors sold more than $30 billion worth of stocks – one of the most extreme weekly sell levels in history. Take a look...

This isn't bubble behavior. And history also tells us that this kind of one-week move is a good sign going forward...

We've only seen three other weekly sells of at least $30 billion since the data begins in 2013. And those were darn good times to buy stocks. Take a look...

As you can see, we saw similar setups near the 2022 bear market bottom... right after the COVID-19 bottom in 2020... and in early 2018.

In each case, stocks moved higher over the next year. And in two of those cases, they rallied aggressively.

This pattern isn't a reason to throw caution to the wind. But it does tell us that while bubble talk is in the public consciousness... investors aren't acting like it right now.

Folks aren't buying like crazy today. And that means you want to stay long right now.

Good investing,

Brett Eversole