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This is what a bubble looks like

The “b” word is thrown around a lot. China credit? Bubble. US S&P 500? Bubble. Australian housing market? Bubble. We are now at the point where any solid rise is labelled a bubble. Yet the characteristics of a bubble are well studied, and most of the markets so labelled do not display them.

Key characteristics of bubbles include a suspension of disbelief. Alert investors listen up for newer versions of “it’s different this time” as a sign a market could be about to pop. The second characteristic is identified on a chart: a strong and sustained price rise that steepens exponentially.

A2 Milk (A2M) added to its lustre with yet another profit upgrade last week. The New Zealand based dairy producer pushed revenue estimates up and advised it will invest some of the additional income in marketing, although less than previously advised this year.

Naturally, the shares rose. However the way they rose is a problem.

The daily chart shows the prices rises are getting steeper. The most recent buying has pushed the gains to almost vertical. Those who believe the share price action is primary evidence of could be very concerned by these developments. This looks very much like a “blow off” phase that precedes a bubble bursting.

So far I haven’t detected any “it’s different this time” arguments around A2M. Another possible but in my view less likely explanation for this dramatic and explosive stock move is that it is step-changing to new, higher valuations. But the instability implied by the gapping higher may see prudent investors locking in at least some of the recent gains.

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