Anatomy of a Bubble. “Rare on Earth”

“Rare on Earth” No secret the rare earth stocks are a “must have” . There are a ton of

“Rare on Earth”

No secret the rare earth stocks are a “must have” . There are a ton of traders out there sitting on some hefty gains, feeling pretty good about themselves. Unfortunately about 70% of those traders are about to give a sizable portion of that back. Kinda like a gambling addict in a casino.

I’m not trying to rain on your rare earth parade. I’m guilty of trading these in and out over the last week. However, when I see daily moves of 60%+ across the board on companies with virtually no revenues. I know whats coming. Now they probably won’t go to zero but the market will ramp the prices up as far as it needs to to unattract buyers. That’s just how it works.

I remember an article I read on the ” Anatomy of a Bubble” written by Hyman Minsky. The anatomy covers 5 stages of a typical bubble. As you read this think of what stage your big winners are in.

Minsky’s Theory
Named after economist Hyman P. Minsky author of Stabilizing an Unstable Economy . The Minsky’s theory of financial instability garnered mass attention during the Internet bubble of 2000 and the credit crisis of 2008 . Minsky identified five stages of a typical bubble. Displacement, boom, euphoria, profit taking and panic. This theory was related more to overall markets rather than individual sectors but  pattern of bubble activity remains fairly consistent.

1. Displacement: A event occurs , such as an innovative new technology or anticipated profit opportunities . Ex the shortage of rare earths needed to fuel weapons and electronics, China’s  restrictions etc.

2. Boom:Prices then gain momentum as more and more participants feed off of the news. As the stock continues to rise the stock often attracts media/analyst coverage. Money flows into these stocks from the hype generated. Fear of missing out on what could be opportunity of a lifetime, the average investor floods blindly into these stocks

3. Euphoria:As the security continues upward it almost seems as if it never moves down an inch to allow a buying opportunity,all caution is thrown to the wind, investors buy at any price and the stock skyrockets. The “bagholder ” has now been created . Usually at this point valuations are so wacky that ridiculous unsustainable new valuations are schemed up to justify the relentless rise in the stocks price.

4. Profit Taking: By this time, the early buyers begin to exit the stocks. Often the largest institutional shareholders who were responsible for a majority of this hype begin to unload massive quantities of shares, leaving Joe Lunchbox holding the bag .

5. Panic:In the panic stage, the stocks will plunge faster than they rose. Investors stare at large  margin calls and portfolio haircuts Investors begin to liquidate them at any price and the stock becomes rebalanced.

Remember. It takes very little to bust a bubble. One or two negative reports can tank these stocks quick. Always remember that 40%+ days are not the norm. It’s ok to ride these bubbles in early stages but be sure to pay yourself  into strength. Do not fall into to the garbage of becoming the bagholder and ignore what you see.

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