Bubble behaviour is clearly visible in the marketplace… Calling the top of a bubble is as hard as winning the lottery. The signs of the mature stage of bubble formation are becoming increasingly evident – leveraged risk taking being the main one. However, the surge in call buying that propelled the S&P 500 and Nasdaq to new highs seems to have started only in late July (see bottom-right chart). This suggests that the risk overhang may not take much longer to unwind.
…but the leverage accumulation so far may not be enough to burst the bubble just yet. If the recent selloff does not intensify further, the whole episode may end up simply emboldening the bulls to buy the dip and take even more risk. The Nasdaq experienced three 17%+ selloffs between 1997 and 1998, only to remerge stronger every time and rise four-fold from the last of those selloffs to the 2000 peak. Leverage is a key characteristic of all bubbles, and almost invariably it is the mechanism that leads to their collapse. But there may not have been enough leverage for the dot-com 2.0 bubble to burst just yet.