Rookie stock broker: “How far up will it go?” Grizzled veteran broker: “Farther than you think!”
This chart shows us the price action of crude oil in US$ for the past 10 years. In the last year, summer 2007 to June 30, 2008, the rate of increase has been increasing. Technical analysts call this “going parabolic.” The price of oil is going straight up!
Whenever the price of anything goes parabolic, we know we are near the end of the up trend. It signifies that many speculators are piling in, driving the price up “farther than you think!”
As you read this article, try to get a “feel” for what it’s like at/near a parabolic top of a market cycle. Here’s what you might notice: 1.The financial press is aggressively covering the story 2. Many new investors are entering the market, speculating it will go higher 3. Many analysts are forecasting much higher prices 4. Everyone is an expert – everyone has an opinion – even the shoe shine boy.
How does all this feel? Is it exciting? Depressing? How does that feeling affect your investing judgement?
This is a list of common mistakes people make when investments go parabolic. 1. Over concentration: they put too many eggs in that one exciting basket. 2. Over confidence: because the profits are made so fast, we become unrealistically sure of ourselves. [Or over reliant on some advisor.] 3.Failing to sell when the up trend reverses.