Farewell to traditional bull and bear markets, the market enters an era of bubble rotation

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Original author: Smac, Partner at Compound VC

Original translation: Saoirse, Foresight News

Editor's note: Currently, market hotspots are emerging one after another, with the AI boom sweeping the scene. Some question whether it will repeat the mistakes of the metaverse hype. Amidst the noisy market conditions, people are often carried away by immediate hotspots and fail to see the long-term trend. To make rational judgments, one must learn to elevate their perspective. This article, by Compound partner Smac, uses weather analogy to dissect the market logic behind successive bubbles.

Meteorology is a fascinating field. Over the past fifty years, various weather forecasting tools have continuously iterated, and the accuracy of weather predictions has improved accordingly. Today’s five-day weather forecast is as accurate as the single-day forecast from thirty years ago.

Most people's understanding of weather is a coherent, moving system: clouds roll in, rain falls, then stops, and the sky clears. Imagine a winter front approaching—you probably picture a vast gray cloud cover spanning hundreds of miles, bringing heavy snowfall. Meteorologists call this type of weather stratiform cloud systems—simply put, like layered cakes, where the entire cloud-covered area experiences the same weather changes.

But weather isn’t only this form. If you've seen summer thunderstorms on plains, you'll notice their operation is quite different. First, a single convective cloud forms: warm, moist air near the ground rises upward, meets cold air aloft, water vapor condenses, forming towering local cumulonimbus clouds. Within an hour, hail, lightning, and heavy rain follow one after another, with visibility often less than a hundred meters.

As the cloud cluster reaches its peak, energy is fully released, then gradually dissipates. The cold air sinking from the storm spreads outward at speeds up to 40 miles per hour. When this cold air hits surrounding warm, moist air that hasn't yet formed a storm, it acts like a wedge, pushing the warm air upward again.

As long as the atmosphere remains sufficiently unstable, this "cold air wedge" can generate new convective clouds several miles away from the original storm.

These new clouds cannot form on their own; although the atmosphere has stored energy, it lacks the trigger. The dissipating storm provides this trigger. Subsequently, the new cloud cluster repeats the evolution process of the previous storm.

When multiple convective clouds form in succession, they constitute a mesoscale convective system. People on the ground will only encounter each storm one by one, each seeming like the entire weather system. One side is calm, with no hint of impending rain; the other side is already clear. But from a satellite view, a series of independent cloud clusters connected in a line can be seen, each at different development stages, moving forward until the warm, moist air along the path is exhausted.

Supercell storm clouds near Amistad, New Mexico, at sunset

This continuous storm system is fundamentally different from the formation conditions of a single frontal weather system. It depends on specific atmospheric conditions:

• Warm, moist air near the ground, acting as the "fuel" for storms;

• Cold, dry air aloft, promoting upward movement of warm air and creating atmospheric instability;

• Wind shear: differing wind directions at various altitudes, causing storms to rotate and move laterally.

When these three conditions are met simultaneously, successive storms will occur in turn.

Having discussed so much meteorology, let’s return to the main topic: these weather phenomena are almost identical to the current state of financial markets.

The past markets resembled stratiform weather systems: alternating bull and bear markets, slow sector rotations, with each cycle lasting several years. From 1982 to 2000 was a long-term bull market, followed by the dot-com bubble; from 2003 to 2007 was a real estate and credit cycle. These market cycles were long and well-structured. Even if investors missed the timing by several years, as long as they understood the overall trend, they could still profit in the end.

But today’s market no longer looks like the past. We are in a chain of convective storm-like conditions: hot sectors emerge one after another like successive storms, and those caught in them feel unstoppable, pervasive.

Funds flow out of overheated themes, fueling new rounds of hot sectors in adjacent areas. The pace of market theme switching accelerates dramatically: AI infrastructure, GLP-1s (a class of diabetes drugs famous for weight loss, now hot in capital markets), stablecoins, quantum tech, nuclear energy, distributed autonomous tech, robotics, aerospace… each sector sparks a full-blown hot trend, with a dedicated group of followers, completing a full narrative cycle, only to eventually fade. After one cycle subsides, the "cold air" it leaves behind ignites the next hotspot in a new field.

Refusing to admit that the current market has fundamentally changed is essentially self-deception. People love to say "this time is different," but ignoring the permanent shifts in the financial environment—either out of mental laziness or stubbornly clinging to old market illusions—is unwise.

The changed landscape of the market

For a long time after WWII, the financial market operated like a slowly moving weather system: bull markets could last ten, fifteen, even twenty years; sector rotations always revolved around long-term macro trends.

Industry themes and leading sectors over time

Back then, sector switches occurred within a unified macro environment. Only at some pivotal historical turning points—such as the collapse of the Bretton Woods system, Volcker’s anti-inflation policies, the peak of the dot-com bubble, or the global financial crisis—would the overall market structure be thoroughly overturned.

This market form was rooted in several structural factors: high transaction costs, low retail participation, fostering long-term holding habits; pension funds as the main retirement assets; the S&P 500’s composition dominated by manufacturing, energy, banking, retail—large companies whose earnings growth roughly tracked GDP, with stable, predictable trends. Additionally, information dissemination was slow: after a company’s annual report was released, most investors would only learn of it weeks later.

Market volatility was also relatively balanced. After a bull market, deep corrections would follow, with gradual deleveraging; bear markets would see slow rebounds. The market would linger in various emotional states for extended periods, with overall structural shifts often measured in quarters or years.

From a meteor analogy: past markets had moderate "fuel," strong atmospheric stability, and minimal wind shear—leading to long, steady trends, allowing investors to plan calmly. Today, all these conditions have changed—some even reversed—bringing about a fundamental restructuring of the market.

Where do these changes come from?

Multiple intertwined and amplifying factors have driven these transformations. Summarizing, there are eight core shifts:

• The democratization of speculation

• The formation of perpetual buy-and-hold

• Passive investing creating a lack of resilient trading counterparts

• Rise of multi-strategy funds and high-frequency trading, eroding middle-market forces

• Artificial suppression of volatility

• Complete restructuring of index component weights

• Elimination of information delays

• Changes in fiscal and monetary policy environment

Democratization of speculation

The current market participants have undergone visible changes. In the 1990s, retail trading volume accounted for only about 10% of total US stock market turnover. High commissions led most retail investors to hold stocks long-term, with little active speculation.

Robinhood pioneered zero-commission trading and introduced a payment-for-order-flow model; in fall 2019, Schwab followed suit by eliminating trading commissions. Fidelity, E*Trade, TD Ameritrade, and others quickly adopted, rewriting industry norms.

The COVID-19 pandemic accelerated this trend: government stimulus, people staying home, gamified trading apps—by 2020-2021, retail trading volume surged to 25%. Many thought this was a short-term phenomenon, but high retail participation has persisted. On April 29, 2025, amid market volatility triggered by tariffs, JPMorgan data showed retail orders hit a record 48%. On normal days, retail volume doubled pre-pandemic levels; during sharp market swings, it can reach 35%.

A deeper change lies in the types of assets retail traders focus on. Stock options have become mainstream, especially intraday-expiring options, which have expanded wildly. The new participants are mainly young, with highly concentrated holdings, trading in line with market themes. More critically, many leverage their positions through unconventional means (not reflected in standard margin data), follow price trends rather than fundamentals, and are prone to herd behavior.

From a weather analogy: today’s "warm, moist near-surface air" is more abundant than ever, storing potential energy at record highs.

Perpetual buy-and-hold formation

I’ve also written about this before. Briefly, the US retirement system has shifted from fixed-benefit pensions to contribution-based plans. Now, individuals must plan their own retirement savings. On the market level, this means each pay cycle involves a large, passive inflow of funds into stocks—forming an automatic, perpetual buy-and-hold.

Traditional pension logic is quite different: fixed-benefit pensions need to manage duration risk against liabilities. Managers actively assess market valuations; if stocks seem overvalued, they rebalance by increasing bonds. Even with slow adjustments, this is more proactive than today’s purely passive perpetual buy-and-hold.

This is crucial: marginal trading capital now has a much greater influence on prices than before.

Passive investing creates a lack of resilient trading counterparts

The essence of passive index investing is to buy and sell strictly according to index weights, ignoring price levels. The larger a stock’s market cap, the more passive funds flow into it; smaller caps see less. This mechanism embeds momentum effects into the market: stronger-performing stocks attract more passive capital. The impressive performance of the seven big tech giants in the US is largely due to this.

Over the years, many articles have analyzed the concentration of index weights in top companies. Of course, these companies’ profitability and growth are also outstanding, so the concentration isn’t entirely unjustified. But the core issue is: passive funds lack a natural "take-profit" switch.

Rise of multi-strategy funds and high-frequency trading, eroding middle-market forces

Alongside the formation of passive perpetual buy-and-hold, active trading has also undergone a major transformation. The rise of multi-strategy hedge funds—like Citadel, Millennium, Point72, Balyasny—has been a hallmark. These firms gather hundreds of independent fund managers, each responsible for specific strategies, under strict risk controls. Their assets under management have exploded, with capital increasingly concentrated in top firms, mirroring the trend of index concentration.

Meanwhile, high-frequency trading now accounts for 50-60% of US stock market volume, and up to 75% in futures. This creates a fragile market environment: inter-entity counterparty risks increase, price discovery weakens. Much of the volume is internal capital flow, not genuine market participation.

Under normal conditions, bid-ask spreads are tight—good for liquidity. But if themes break down, positions become extremely unbalanced, or risk controls are triggered simultaneously across firms, the microstructure can collapse instantly. When all fund managers’ risk exposures are highly correlated, and stop-loss rules align, a forced deleveraging by one can trigger a cascade. The market crashes in Feb 2018, Aug 2019, March 2020, and August 2024 are typical examples. This structural fragility has become entrenched and will likely recur.

Traditional fundamental hedge funds—long/short equity funds relying on deep research—are gradually pushed out. They typically hold 20-40 stocks over several quarters. Now, such funds are either absorbed by large asset managers or shift to primary markets, family offices, or single-strategy funds. I believe that understanding theme shifts and maintaining patience amid short-term capital flows can still generate significant excess returns.

Artificial suppression of volatility

Considering the above four points, it’s easy to understand current volatility trends. Data shows that since 1990, about two-thirds of the trading days in the US stock market saw the VIX below 20; intra-day correlation of volatility is as high as 85%, meaning daily volatility tends to persist.

But the mode of market volatility switching has become extreme and unbalanced: many studies show that long-term suppressed volatility, once breaching a critical threshold, can explode violently within days; yet, the decline back to low volatility is slow, often taking weeks.

Multiple structural reasons underlie this: a large "volatility shorting" industry has emerged. The proliferation of intraday-expiring options has further suppressed intra-day volatility through market maker hedging. The market remains in a prolonged low-volatility calm, but risk accumulates. When tail risks materialize, everyone rushes for the exits.

In short: today’s volatility distribution is increasingly skewed—long periods of low volatility build up energy, only to be released in a more intense burst.

Complete restructuring of index component weights

The sixth transformation concerns the composition of the stock indices themselves. In 1980, the S&P 500 was dominated by manufacturing firms: industrials, raw materials, energy, financials, consumer staples. These companies’ earnings growth roughly tracked GDP, with stable, predictable valuation multiples. Even estimates of five-year profits for companies like Procter & Gamble would not deviate significantly.

Today, the landscape has changed dramatically. Information technology, communication services, and tech-heavy consumer discretionary giants like Amazon and Tesla now account for over 40% of the S&P 500’s weight. Their profit models are no longer linear: software margins are near zero; AI is full of uncertainty—will AI labs become the core infrastructure of the next half-century, or just bottomless money pits? Market views are polarized.

For these companies, short-term profit forecasts are difficult, and long-term value is highly uncertain, causing valuation swings. Company valuations are less driven by financial statements and more by market narratives. Investors who can anticipate technological trends, understand competitive moats, and position in emerging markets can find abundant alpha opportunities.

Traditional manufacturing firms expand gradually, with stable discounted cash flow valuations. Their multiples tend to revert to reasonable levels. But now, company valuations depend heavily on market sentiment about their growth stories. I don’t think traditional valuation models are invalid, but this is the current reality for new economy firms.

Mainstream indices are increasingly filled with these long-duration, narrative-driven companies. The steeper the atmospheric temperature gradient, the more energy is stored; similarly, the more such companies there are, the greater the market’s latent momentum. Once triggered, volatility can become intense.

Information delay has been completely eliminated

Everyone can feel this intuitively, but its impact is often underestimated. Historically, market information dissemination was limited by communication channels. Today, information spreads almost instantaneously.

Especially for holdings data: the speed of disclosure far exceeds the past. Investors can see real-time reactions from industry insiders, and more people openly share their positions. The flood of real-time info fuels comparison and FOMO—profit screenshots are everywhere, stories of "turning a thousand into millions" go viral, and anxiety about missing out intensifies.

Changes in fiscal and monetary policy environment

This point needs little elaboration. The core summary:

• US monetary policy remains broadly accommodative, with real interest rates low;

• Quantitative easing continues to expand the Fed’s balance sheet;

• Low discount rates inflate the prices of all long-duration assets;

• Fiscal policies are ramped up, with subsidies and industrial bills rolling out;

• Full employment pushes fiscal deficits to wartime levels;

• The economy shows K-shaped divergence, with disjointed trends between financial markets and the real economy.

How do storms form?

Combining all these changes, the emergence of successive market bubbles becomes inevitable.

Market evolution can be divided into several stages, with clear logic:

• Dormant phase: sectors are neglected, attention is low. Yet, some insiders persist in deep research.

• Initiation: breakthroughs in technology, policy shifts, earnings surprises—initially spotted by seasoned analysts.

• Narrative formation: hotspots coalesce into a unified market concept, dissemination becomes easier. Though some criticize oversimplification, it’s undeniable that simple stories help retail investors understand and participate.

• Divergence of perceptions: market opinions split. While some remain bullish, potential buyers outside the core decline; valuation gaps widen.

• Bubble burst: in hindsight, turning points are obvious. Today’s market participants are eager to pre-guess the top, driven by online hype and traffic chasing. When narrative cracks, funds exit en masse, seeking new opportunities.

• New hotspots emerge: capital fleeing old sectors flows into new ones, like cold air wedges igniting the next wave.

Future outlook

This new market structure will have profound impacts. We can predict the overall trend but cannot pinpoint the exact timing of each hotspot.

Post-pandemic, many believed market anomalies were short-term or due to low interest rates. While some of that is true, it’s clear that the overall macro pattern has shifted permanently. The eight transformations mentioned earlier are unlikely to reverse:

• Trading commissions won’t rise again;

• Passive investment scale won’t shrink;

• Traditional fixed-income pensions will exit the mainstream;

• Social media and info dissemination will only accelerate;

• Large multi-strategy funds, despite uncertainties, won’t disappear soon given their scale and profitability;

• Information delays will not re-emerge.

Today’s market environment has become the new "normal climate." Returning to the slow, stratiform markets of the 80s and 90s is wishful thinking—most prefer to deny this reality.

Some also believe that the duration of hotspots will keep shortening. This is hard to confirm, as markets tend to fall into a "mutual pre-guess" game. But one thing is certain: each cycle familiarizes participants with patterns, speeding up subsequent waves. Cryptocurrency traders, too, are gradually adapting to traditional finance’s gameplay. However, narrative-driven cycles have inherent lower bounds—they won’t infinitely accelerate.

This rotation bubble market favors two main types of investors: first, deep research analysts who understand technological barriers, regulations, supply chains, and profit models, and can judge whether market expectations are realizable. Many mistakenly think AI tools make them experts—this is risky. Second, trend observers—most investors fall into this category—whose main task is to interpret the behavior of mainstream professional players.

Meanwhile, many promising themes remain: AI infrastructure and applications, robotics, physical AI, precision medicine, cryptocurrencies, materials science, nuclear fusion and advanced fission, grid storage, aerospace, brain-computer interfaces, quantum tech. Even within the same sector, different subfields and tech stacks will see cycles of hot and cold.

Retail investors currently hold a natural advantage: flexible timing, nimble operations, no need for institutional decision meetings, and no quarterly redemption pressures. Years of "buy on dips" strategies have built a solid profit base for retail. As long as risk controls are in place, retail can thrive in this new environment.

Stepping out of the storm, viewing the big picture

The previous analysis of market structure might seem subjective, but I have my own perspective. In primary markets, we can still choose projects that do not exacerbate negative social effects. But in secondary markets, the most common mistake is to judge the market based on one’s idealized expectations.

This is a human emotional weakness—history shows even Newton suffered huge losses due to emotional trading.

Emotions are a major obstacle to investment returns. Many asset managers repeatedly voice bearish views or predict recessions, but most of these predictions rarely materialize.

The market will never revert to the old ways. Is this chain of storm-like cycles more distorted than traditional markets? I can’t say for sure. But objectively, the many transformations shaping today’s landscape are overall positive: lower investment barriers, widespread automated retirement planning, richer passive tools, more real-time info—giving ordinary people more opportunities to participate in finance.

From the ground, every storm seems overwhelming, and people’s vision is limited to the current scene. This is the real experience of everyone caught in each sector’s hot phase: markets are like black holes, absorbing all liquidity. Only by elevating your perspective can you see the full chain: one hotspot ends, another begins, in a cycle. Every participant is caught in the current frenzy or anxiety.

The allure of financial markets lies in their constant change, with price discovery still driven by human nature. Emotions are innate, and mistakes are repeated. This contradiction creates everything we see today: seemingly chaotic, but when viewed from a higher level, just successive bubbles rolling over each other.

The core purpose of this article is to encourage everyone to step out of the immediate storm, observe from a higher dimension, see the main trend clearly, and avoid being swept away by the emotions of a single hotspot.

The principle is simple, but it requires strong discipline—easy to understand, hard to practice.