An eco bubble is a temporary post-bubble rally that occurs after a major stock market crash. It is caused by investors trying to determine the cause of the crash and some seeing an opportunity to buy stocks at a lower price. The rally is usually not as pronounced or long as the original bubble and prices never regain what they originally achieved. The NASDAQ provides a good example during the dot-com bubble.
An eco bubble is a situation that occurs after the collapse of a major bubble in the stock market. Usually after this occurs, there is a short, but temporary, post-bubble rally that takes place within a couple of days, after the crash. This rally is called an echo bubble because it is usually not as pronounced or long as the original bubble, thus resembling an echo.
The eco bubble occurs while investors are still trying to determine what’s going on with a market crash. They have to answer a series of questions. Investors may wonder if this is a temporary situation caused by a company going bankrupt. They may also be wondering if there is an impulsive panic reaction based on emotion, not a good deal. Investors also need to consider when the market will resolve.
As investors grapple with these questions, the normal course of business must continue. Some, through their own day trading practices or perhaps through a financial advisor, may believe they see an opportunity. Stocks that looked bad in value before a crash suddenly look significantly better at a lower price. There are speculators who get involved in the buying action causing an eco bubble.
This buying action pushes inventories higher on a temporary basis because demand has increased. In a true eco bubble, however, prices never regain what they originally achieved, at least not in the short term. When a crash occurs, there may be a period of sustained and slower growth, but this is not a bubble. This is normal market behavior.
Post-bubble rallies almost always happen. When the dot-com bubble collapsed in 2001, there was a brief rally, but it wasn’t sustained. The NASDAQ, which features high-tech stocks, peaked above 5,000 points at one point. It quickly dropped to a level around 3,500, then rallied back to over 4,000.
In October 2002, the NASDAQ bottomed at 1,110 points. Between March 2001 and October 2002 there were large losses, and not many gains, thus becoming eco bubbles. Since then, the NASDAQ has slowly begun to rebuild, though not at the rate it did during the bubble years.
An echo bubble is usually quite easy to see. It has a definite starting point just after a large loss in the market, followed by an end point where the loss will be nearly equal to the gain of the echo bubble, although it may be more or less. While the NASDAQ provides a good example during the dot-com bubble, all other markets can also have post-bubble rallies.
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