If A Tech Bubble Is Forming, How Long Before It Bursts?

Could the FTSE 100 (INDEXFTSE:UKX) be about to plummet?

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After celebrating its 30th anniversary this year, the Footsie must feel like a morose clown on a day off, unable to figure out whether to smile or burst into tears.

It was barely even a month ago that the FTSE 100 (FTSEINDICES: ^FTSE) reached a 14-year closing high.

The blue-chip index closed at 6,865 points in late February, which was within sight of the all-time record of 6,930 set on 30 December 1999.

But since the start of this week The FTSE 100 down 178 points to 6,534, and going back to February, when it almost scaled new heights, the index is down around 5%.

This shouldn’t come as much of a shock

I may be stating the obvious here, but the market goes down as well as up. Yet for some, the nearer the market gets to hitting new highs, the worse.

We’re still in the midst of an economic recovery, remember. And living standards aren’t going to reach the level they were at pre-crisis any time soon.

stock exchangeBut that said, stock market flotations are a dime a dozen, and on track for the best quarter since the 2007 crisis.

What’s potentially worrying is the valuation of some of these companies. Shares in newly listed AO World surged up to 45% higher on its first day of trading.

Similarly, loss-making Ocado’s (LSE: OCDO) share price has rocketed 358% in the last two years, as far as I can tell based on heady assumptions that contradict reality.

Stop me if you’ve heard this one before

The last time investors ploughed their money into overvalued online businesses the market crashed. But don’t say that this is the start of another tech bubble.

Now, while I’ve expressed my reservations about Ocado, it’s still a business. To put it another way: Ocado isn’t spending all its “dot com” money on champagne and gold jet planes.

I believe its investors have an idea what they’re getting into. The internet has revolutionised the way we shop and Ocado, thanks to its proprietary tech, does it the best.

At present, I just don’t think its valuation stacks up (no dividend, it’s loss-making), but I can at least understand how someone less risk averse may think otherwise.

We’re probably moving sideways now

The consensus is that the FTSE 100 will reach 7,000 this year, and at some point it likely will.

To paraphrase Buffett, the market has risen through depression, recession, oil shocks and a disease epidemics.

But on average it’s gone down one in every three years, too. That’s good, as it provides an opportunity to buy.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Mark does not own shares in any company mentioned.

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