OPINION: Here's what you should do if day trading is in a bubble: Either ride the bubble or sit it out and hunt for discounts during the bust.
The coronavirus shutdown has resulted in a resurgence of day trading, particularly on zero-commission apps. But could the entry of large numbers of speculative day traders create a bubble in stocks?
Many novices gave up their jobs to become day traders, most of them borrowing heavily to invest on margin.The prospect of margin calls made markets spectacularly volatile -— even those who weren’t borrowing to invest had to worry about forced sales suddenly driving prices down. With markets on a knife edge, all it took was a handful of large trades in the shares of automobile companies to trigger one of history’s greatest crashes.
The result was internet shares rising by over 1,000 % in the two years up to February 1998—then losing all of these gains by the end of 2000. What should I do? If day trading does lead to a bubble, how should investors react? Our study of bubbles over the past 300 years suggests two options. In 2001, Amazon AMZN, -1.78% stock was trading at $6, down from a high of $106 -— today that same stock is worth close to $3,000.Although stock prices SPX, +0.06% are high by traditional measures, this doesn’t necessarily indicate a bubble. Instead, we think investors are betting on the willingness and ability of central banks to prevent the dramatic crashes of the past through quantitative easing and other extraordinary measures, as they did in March of this year.
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