Investors Can't Ignore This Clear Sign Of A Stock Market Bubble

Compounding Cash profile picture
Compounding Cash


  • Rapid growth compared to historical averages can look like the sign of a bubble forming.
  • When you put stock markets in a long-term perspective they don't look like a bubble.
  • Individual stocks may rise quickly but that could be a sign that they have real value rather than being a bubble.
  • It pays to be cautious. You also need to be aware of where there is real growth potential.

The other day I saw a comment on social media saying "index funds are a bubble". After a civil and thoughtful discussion I got some more details.

Apparently this graph was cause for concern:


When you put it beside a chart of any major stock market index such as the S&P 500 (SPY) the resemblance is clear:

(source: Google Finance)

With a rise that quick in recent years, how can it be anything other than the early stages of a bubble?

I did a quick experiment. I took a clip showing another quick rise, and got confirmation that it does indeed look like a bubble that's forming:

(source: Google Finance)

That looks like a dangerous situation! In fact it comes from this chart of the DJIA (DIA) -- the segment shown above is circled in red:

(source: Google Finance)

Chart Blindness

It turns out that this is not in fact a sign of a bubble forming.

You know those maps that make Greenland look like the biggest country in the world? That's not true, it's just what happens when you draw a sphere inside a rectangle. Areas near the poles look much larger than they really are. Despite the error those maps are still common.

Price charts are similar. They make changes from a higher starting price look bigger than they really are. It's just what happens when you draw a compounding (exponential) series of prices in a linear chart.

The early years of compounding look like nothing is changing much, when compared to a later period after it has really built up. A 10% change from a price of $2,600 looks a lot bigger than a 10% change from a price of $260. This is an illusion but the charts are still everywhere.

If we didn't expect exponential

This article was written by

Compounding Cash profile picture
Individual investor. Strong preference for index funds. Researching a few stocks with great long-term potential for growth in earnings, cashflow, or assets. Mostly long, with rare short/option trades. See more articles at

Disclosure: I am/we are long VTI, FB, BITCOIN. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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