A true bubble, like the dot-com crash, involves stock prices falling over 50% and staying depressed for years, with capital infusion dropping similarly. Short-term market corrections don't meet this historical definition. The current AI boom, despite frothiness, doesn't exhibit these signs yet.

With the S&P 500's Price-to-Earnings ratio near 28 (almost double the historic average) and the Shiller P/E near 40, the stock market is priced for perfection. These high valuation levels have historically only been seen right before major market corrections, suggesting a very thin safety net for investors.

Ray Dalio argues bubbles burst due to a mechanical liquidity crisis, not just a realization of flawed fundamentals. When asset holders are forced to sell their "wealth" (e.g., stocks) for "money" (cash) simultaneously—for taxes or other needs—the lack of sufficient buyers triggers the collapse.

Veteran investor Jim Schaefer notes a recurring pattern before recessions: a massive, euphoric movement of capital into a specific area (e.g., telecom in 2001, mortgages in 2008). This over-investment inevitably creates systemic problems. Investors should be wary of any asset class currently experiencing such a large-scale influx.

The most profitable periods for trend following occur when market trends extend far beyond what seems rational or fundamentally justified. The strategy is designed to stay disciplined as prices move to levels few can imagine, long after others have exited.

Calling a market top is a technical exercise, as fundamentals lag significantly. A reliable sell signal emerges when the market's leadership narrows to a few "generals." When a critical number of these leaders (e.g., three of the top seven) fall below their 200-day moving average, the rally is likely over.

Widespread public debate about whether a market is in a bubble is evidence that it is not. A true financial bubble requires capitulation, where nearly everyone believes the high valuations are justified and the skepticism disappears. As long as there are many vocal doubters, the market has not reached the euphoric peak that precedes a crash.

Contrary to intuition, widespread fear and discussion of a market bubble often precede a final, insane surge upward. The real crash tends to happen later, when the consensus shifts to believing in a 'new economic model.' This highlights a key psychological dynamic of market cycles where peak anxiety doesn't signal an immediate top.

In a late-stage bubble, investor expectations are so high that even flawless financial results, like Nvidia's record-breaking revenue, fail to boost the stock price. This disconnect signals that market sentiment is saturated and fragile, responding more to narrative than fundamentals.