Bubble
A bubble is hard to exactly define. It may be argued that a bubble can only be truly seen in perspective after it has burst.
Generally speaking, a bubble is when the price of a security(stock or commodity) rises far above its fair value in relation to its fundamentals. However, the term bubble may be overused—many people believed oil to be in a bubble in $80-$100 yet it rose to hit a high of $148(Current date of writing 8/11/2008).
During a bubble, market participants are usually giddy and expectations about the future are highly optimistic, bordering on delusion. Some contrarians believe that when mainstream media heavily covers a certain item, the bubble may be near its peak, but such a hypothesis can be refuted on various real-life examples.
According to George Soros, a bubble forms as thus. Strong fundamentals cause a security’s price to rise in an uptrend. Market participants notice and more jump on the bandwagon. At some point, market participants sell abruptly and cause a sharp fall in the price. After some time, the price rises to a new high. The correction is a test, and a successful test reinsures market participants that things are ok and the uptrend is strong. A bubble may be reinforced by various successful tests. The trend is self reinforcing until some point when the fundamentals are deteriorating and cause enough selling without any eventual reversal. In terms of commodities, this would be a case when the demand is restricted due to the high prices and more supply is brought to the market due to an increased incentive to produce. The excess supply would be a negative shift for the commodity’s fundamentals. As for stocks, various events may mark the peak of the bubble, including a shift in monetary policy, a large company failing to rise critical financing etc.
Many things called bubbles are not truly bubbles, but for the real bubbles one thing is certain: they will pop, it is just difficult to tell when. And with each successful test, the belief of market participants that the bubble has not popped yet is stronger.