Are we on the verge of another market bubble, driven by AI hype and herding bias? Learn how extreme asset allocations and market rotations may signal hidden opportunities—and where the real risks lie for investors today.

I recently came across an article from Time Magazine that read, “(It) is poised to be the most significant cultural innovation of the century, bringing voices and music into every home in America. The opportunities for investment in this field are boundless.”

The "It" being described was radio, and the article was published in 1920 during the electricity and radio boom.

Fast forward and a Wired magazine article echoed a similar sentiment about a different innovation: “This is the beginning of a new economy, one where the rules of the past no longer apply. [It] is going to change everything: commerce, entertainment, and even how we live our daily lives.”

This time, the article was referring to the internet from 1997, right at the onset of the Internet Revolution.

In both cases, investors flocked to these emerging technologies, often without fully understanding the risks. As a result, these booms ended in dramatic fashion. The radio boom was curtailed by the Great Depression in 1929, and the internet boom met its end in March 2000 with the Dot-Com Bust. Few companies that were part of these bubbles survived.

Herding bias was a significant driver in both cases. This psychological phenomenon fuels the fear of missing out (FOMO), leading investors to chase after the hottest trends without fully understanding the fundamentals or how these investments fit into their asset allocation. When the bubble bursts, the consequences can be severe.

It’s not entirely the fault of individual investors either. News outlets contribute to this behavior by feeding into availability bias, relentlessly covering whatever the hot topic is—today, that’s artificial intelligence (AI).

This brings us to today. While AI dominates the headlines, let’s look at how investors are actually allocating their assets in this environment.


The American Association of Individual Investors (AAII) regularly surveys investors about their asset allocations. The chart above illustrates the relationship between total stock and bond allocations over the past 35 years.

Currently, stock allocations are at 70%—some of the highest levels we've seen in over 25 years. Conversely, bond allocations are at some of the lowest levels in 15 years. In other words, asset allocations have shifted to extremes, with a strong preference for risk-on assets like stocks and an aversion to risk-off assets like bonds.

Extreme allocations like these have traditionally been contrarian indicators. When everyone is herding and chasing a particular investment, the opportunity often lies in doing the opposite.


Source: StockCharts.com, Weekly RRG with 5 period tail as of September 10, 2024

This is where Relative Rotation Graphs (RRGs) come into play. RRGs are a tool that visualize asset momentum, showing how different asset classes are performing relative to each other. They rotate around a central focal point—often a balanced asset allocation fund like the Vanguard Balanced Index Fund. The further from the center an asset is, the more volatile it tends to be, while assets closer to the center are usually less volatile and adjusting at a slower pace

RRGs provide valuable insights into potential risks and opportunities. Currently, equity indices like the S&P 500 and Nasdaq Composite are rotating from the leading quadrant to the weakening quadrant. At the same time, bond indices are moving from the lagging quadrant into the improving quadrant.

This rotation suggests that the next major opportunity could be in the most under-owned asset class right now: bonds. Meanwhile, the biggest risk could lie in the most crowded trade—domestic equities.

Sometimes, the best strategy is to avoid the herd and seek out the unrecognized opportunities.

With market rotations underway, now is the perfect time to reassess your portfolio. Don’t wait for the next bubble to burst—reach out to SYKON Capital today to explore how our values-based, contrarian approach to investing can help you navigate these shifts and help secure your financial future.