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Thar' She Blows The AI Trade October 10 2026

 

Thar' She Blows

The AI trade 

Wait for it..

 

(Bloomberg) – “Billionaire Ray Dalio warned that artificial intelligence (AI) is a "classic bubble" that is nearing a bursting point thanks to rising interest rates and the need to turn wealth into cash”.

And welcome to Wayne’s world.
Well, actually my world. And Ray Dalios’.

I have, on more than a few occasions, have said to beware of AI stock prices, only to be right for a few days, then see AI stocks hit more all-time highs.

Seriously now, cautious investing is warranted when stock prices are anywhere near the multiples resembling the early days of the Dot.com bubble.  Back then, stocks like Pets.com went ballistic only to crash and burn as early “investors” bailed out to massive profits.

AI stocks have been on a tear for close to two years. Not straight up mind you. There have been scary price vortexes from time to time, sucking back billions of profits.

Sell-offs shake out what they call the “weak hands”.

But those weak hands are usually not mom and pop investors. Mom and Pop don’t have the good sense to take profits when things start to wither.

The weak hands they speak of are nervous traders that see any downtick as the beginning for a massive sell-off. Usually not the case, but selling at the first sign of trouble can save the proverbial bacon at times.

More often than not, mom and pop just sit there and think things will return to normal. The normal of straight up that is, which is anything but normal.

In any case, I always tell investors the markets can stay illogical longer than you can stay liquid. The saying applies to professional option traders. Options are high powered investing (gambling) tools that magnify up and down moves by 100 times or more.

 As a result, it’s rare that an option trader will ride a security to zero. Heck, they seldom ride an option position down more than a few percentages before ejecting the position. That’s because the 100-1 (or more) leverage can wipe out an option trader’s entire net worth in minutes if moves are violent enough. Leverage works wonders on the upside but also can bring the wrecking ball when things go south.

No such discipline exists in most retail (mom and pop) investors nor their advisors. They go by, and often repeat, the mantra, “stocks always go up in the long run”.

Professional traders who use their own money don’t listen to such nonsense. Option traders especially don’t live long enough using that strategy to even say the phrase.

For mom-and-pop investors, many have had success using that belief, but it can be stressful in severe market sell-offs.

That said, the current AI trade has all the classic signs of a bubble.

Keep in mind, however, those in early on such manias and who have the guts to stay a while can make buco bucks. Keeping those profits is the trick and many amateurs give it all back and then some as the greed DNA takes over the commonsense sector of the brain.

I don’t know, nor does anyone else, when the AI trade will hit the skids. When super-hot sectors deflate, they can do so surprisingly fast.

 I also liken it to an “everybody in, everybody out” moment. When vast profits are made  quickly, and by a large number of investors, many are of the “tag-along” variety that just bought because everybody else was buying. Fundamentals go out the window early and it’s a pile on moment.

When the air comes out, just imagine somebody yelling shark on a crowded beach. It’s everybody out, all at once, and many get trampled underfoot in the resulting melee.

In conclusion, when I avoid such hot sectors, as I often do, I might end up losing out on all the fast money being made. But there is something in me that just won’t bite on prices that seem to go straight up forever and a day.

I would love the high, true. But it’s the hangover I won’t miss. And often, the hangover is much worse than the party that preceded it.

“Watching the markets so you don’t have to”

   This article expresses the opinion of Marc Cuniberti and is not meant as investment advice, or a recommendation to buy or sell any securities, nor represents the opinion of any bank, investment firm or RIA, nor this media outlet, its staff, members or underwriters. Mr. Cuniberti holds a B.A in economics with honors from SDSU in 1979. His website is moneymanagementradio.com.

 

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