Is an AI Bubble Bad for Investors?

The major indexes are at all-time highs after six straight weeks of gains. Iran rejected the latest U.S. proposal on Sunday, oil is back near $99 a barrel, and President Trump heads to Beijing on Wednesday for two days with Chairman Xi. CPI is due Tuesday morning, and PPI on Wednesday.

Conditions are ripe for a potential sell-the-news reaction to a variety of headlines.

The main topic of conversation in the financial media is not about the sell-the-news risk. It is about whether we are in an AI bubble. The Wall Street Journal ran a piece on Friday discussing the "Chip-Stock Juggernaut" and noted that the last time this happened was during the dot-com era.

Despite the chip frenzy, most of the market is actually down since the bombing of Iran began in February. As semiconductors go parabolic and the Mag 7 keeps grinding higher, the bubble debate will only get louder.

The more important question is whether an AI bubble is actually harmful to investors.

Hot Pockets Are a Feature of Markets

Pockets of wild momentum, as we have in semiconductors right now, are a regular feature of markets, not a sign of impending doom. We have seen many themes develop this way over the years, including solar energy, SPACs, rare earths, shipping, cannabis, EVs, lithium, uranium, and quantum computing. There is always something that is running hot.

Treating "this group is parabolic" as a five-alarm fire ignores the actual history of markets. Hot pockets develop, they correct, and they sometimes come back. The trader's job is not to call the top. It is to participate while the trend is working and manage risk along the way.

Soros Had the Right Idea

George Soros once said something like, "When I see a bubble forming, I rush in to buy, adding fuel to the fire. That is not irrational." The irrationality is not in the buying. It is in believing the bubble will last forever.

Soros aims to be the first one in and one of the first ones out. That is the professional approach. Stepping aside because something looks like a bubble means missing the move entirely, and the great majority of the gains usually come before everyone agrees a bubble is happening. Active, disciplined participation is the correct response if you are a trader looking to navigate the market effectively.

Narrow Breadth Helps Stock Pickers

The general presumption of the bears is that narrow breadth is a negative. That may be true if your focus is trading indexes, but if you are a stock picker, narrow breadth creates more opportunities to find favorable setups.

It also tends to lead to strong rotational action, which is exactly what we have seen with software cracking and infrastructure ripping inside the AI group. Let the bears whine about breadth while you exploit it with aggressive trading.

Sentiment Timing Is a Fool's Game

I dislike the whole game of trying to determine market sentiment to see if it is "too extreme." Sentiment is not that simple. It is a complex emotion, and it isn't as simple as bearish or bullish. Trying to time the market on that basis seems foolish to me.

Most intelligent traders are opportunistic rather than bullish or bearish. They constantly adjust their bias as the tape changes. Trying to time the market because "everyone is leaning in one direction" is an impossible task.

The idea that the "herd" of investors is full of idiots is just plain wrong. The crowd is right most of the time, and that is why trends persist and momentum works. The crowd is wrong only at extremes, and extremes are notoriously hard to identify in real time. Conditions favor trends that last far longer than most people think is reasonable.

What 2000 Actually Taught Me

One thing to keep in mind amid all this bubble talk is that not everyone gives back all the gains they realized. Many pundits believe everyone will be wiped out when a turn occurs. That simply is not true. You may give back some gains, but if you have an effective trading methodology, you will have a cushion of profits to protect yourself.

Back in 2000, I gave back profits when the bubble popped. I'll never forget the week of April 15 when I had my biggest losses ever and had to pay a huge tax bill on top of it. Within a few months, however, I had my accounts back at highs and kept them close to that level for a long time as the bear market played out.

The bubble popped, and it did cost me, but a disciplined methodology worked. A cushion of profits was there, and the focus on not giving back gains was life-changing.

The Real Cost of Top-Calling

The worst thing about the top-calling bears is not only that they have been buried by their poor timing. They have also missed out on some fantastic upside. The opportunity cost of trying to time a top is substantial, and when you factor in the inaccuracy of timing, you can see what a terrible strategy it is to fight a trend.

Bears who have been wrong all year are wrong twice. They missed the gains on the way up, and they have no cushion of profits to absorb the eventual drawdown when it comes. Fighting a trend is expensive twice over.

My Strategy

So is an AI bubble bad for investors? Not if you participate while it is working and manage risk on the way. The bubble label is not a sell signal. It is just an attention-grabbing headline. The job is to stay engaged with the flow, riding rotation as it shifts within the group, and keeping your cushion of profits intact so you have something to give back when the eventual top arrives.

The potential for a sell-the-news reaction is high as we are hit with Iran headlines, Trump in China midweek, CPI tomorrow, and PPI Wednesday. Be ready for it, but that does not mean fading the trend in advance.

I continue to stay focused on finding good chart setups and trading them aggressively. There is a lot of noise out there right now that is trying to distract you from the opportunities that exist. Make sure you stay focused on the right things.

At the time of publication, Rev Shark had no positions in any securities mentioned.