BUBBLE BASICS
How to spot a stock market bubble
Bubbles rarely announce themselves with one perfect number. They emerge when expensive prices, easy financing and confident behavior begin reinforcing one another.
Start with valuation, not headlines
High prices alone do not prove a bubble. Compare prices with durable earning power and the size of the economy. Shiller CAPE and market value to GDP are slow-moving gauges that reveal when optimism has become historically expensive.
Look for fuel
Leverage turns enthusiasm into fragility. Fast-rising margin debt means more investors are borrowing against securities, which can amplify gains on the way up and forced selling on the way down.
Demand confirmation
Positioning, credit spreads and volatility show whether investors and lenders are behaving as if risk has disappeared. A convincing bubble signal is broad: several independent gauges should be hot at the same time.