There is a gambling mood in the air. Tesla, Bitcoin, Gamestop, travel and tourism industries, tech stocks, etc. For the last 12 months, the people who made the most money have been the people piling into the things which are least justifiable. Watching them succeed has caused a lot of investors to change their risk profile (guilty).
There must be something rational about the herds rushing toward risk. Perhaps the probability of a 2nd stimulus bill happening in March has everyone seeing a repeat of April 2020. Perhaps buying into high-beta stocks at a time when the S&P500 and Nasdaq just hit PE ratios of 40 is done with the expectation that there is a bit more valuation expansion to squeeze out until we correct.
The S&P500 returned 19.5% in 1999, even as the irrational exuberance was obvious. Thus, the cost of being correct about the existence of a dangerous bubble in late 1998 and therefore going to cash was 20% in a year, plus dividends, - although in all fairness, one would probably get into a treasury yielding 6% or so - an option we don't get today.
In hindsight, the correct way to play the 90's bubble, if one didn't know the exact timing, was with trailing stops and an IPS that said you'd stay out a year or two three* when the breach indicated the bubble was over. One would receive returns up to the end and then maybe get out after losing only, let's say, 10% of the winnings. If enough market participants are playing with stop loss orders, and they are doing so with the most volatile stocks, the stage could be set for a flash crash, maybe faster than what we saw in March 2020, or maybe a series of corrections and rebounds as they are stopped out, buy back in, and repeat.
I'm looking at other strategies that I could ride through a potential correction, or lack thereof:
-Calls & Cash: 10% S&P500 LEAPS call options, 90% short duration or muni bonds.
-Collar: Limit losses and gains to 15% a year, at minimal cost.
-S&P Long Calls + VIX Long Spreads: Hedge using volatility, and maybe win both ways.
*The staying out part would be hard for someone who escaped the carnage in 2000, but didn't know they had 2001-2003 to go.