The financial markets are awash in liquidity, thanks to unprecedented fiscal and monetary stimulus. Investors have been eager to put that cash to work. Perhaps too eager.

We’re seeing a rush into exotic (and sometimes toxic) assets, driven by the Fear Of Missing Out, aka FOMO. Rampant speculation often indicates a market top, especially when stocks seesaw on mere rumors. When assets are rising only because they have risen, the greater fools are setting themselves up for a fall.

Conditions are bullish for the long term, as the economy reopens and vaccination rates accelerate. But the frothy stock market remains vulnerable to quick sell-offs, due to a host of risks that include inflation and rising interest rates.

On Wednesday, the Dow Jones Industrial Average fell 164.62 points (-0.48%), the S&P 500 declined 12.15 points (-0.29%), and the tech-heavy NASDAQ slipped 3.90 points (-0.03%). The yield on the benchmark 10-year Treasury note rose 4 basis points to 1.678%. The yield on the 30-year Treasury bond rose 2 basis points to 2.38%.

In pre-market futures contracts Thursday, stocks were trending higher, as investors shrugged off inflation fears.

Musk’s many moods…

Indicative of market speculation right now is cryptocurrency mania. Unless you live on a desert island without WiFi, you’ve been subjected to a lot of hype about crypto. Cryptocurrencies are a digital means of monetary exchange that are secured by encryption, with no physical representation of the “money.” The exchanges are recorded in so-called blockchains, which comprise the infrastructure behind the currencies.

Here’s my view: When an asset with no intrinsic value is driven sharply up and down in price by the random posting of online messages that are roughly 280 characters in length, it’s a red flag to stay away from that asset.

I’m referring to Bitcoin (BTC), the first and largest cryptocurrency, and the tweets of billionaire Elon Musk, the founder and CEO of electric carmaker Tesla (NSDQ: TSLA). Musk’s tweets in recent days have roiled the value of Bitcoin.

Musk is visionary, charismatic and mercurial. He exerts an outsized influence on social media. Musk has been an outspoken fan of cryptocurrency, but lately his stance has been contradictory, putting Bitcoin on a roller coaster. Over the past week, Bitcoin’s valued has plunged.

Last Wednesday, Musk tweeted that Tesla would no longer accept Bitcoin as payment for its products, because of environmental concerns about the heavy energy consumption of crypto “mining.”

Crypto mining is the process of using a high-speed computer to process cryptocurrency transactions and obtain a reward based on that work. (Confused by what that means? You’re not alone.)

Musk’s tweet represented an abrupt change of the company’s policy, announced just two months earlier, to accept Bitcoin. The tweet tanked Bitcoin’s value by 15%.

Then on Sunday, Musk tweeted that perhaps Tesla would sell (or had already sold) its vast Bitcoin hoard. The crypto subsequently fell to its lowest level since February.

See the following exchange of tweets:

A “crypto whale,” by the way, is slang to describe large players in the cryptocurrency markets. Specifically for Bitcoin, they are individuals or entities holding more than 1,000BTC. (I’ve taken the effort to read some their messages on social media and typically, their financial illiteracy is frightening.)

On Monday, Musk reversed himself again, tweeting that Tesla had not dumped Bitcoin after all, which stabilized the crypto’s price.

Over the past five days, Bitcoin has fallen about 19%. This chart tells the story:

Musk’s tweets and actions also have dramatically affected the cryptocurrency Dogecoin (DOGE). During a May 8 stint as the host of Saturday Night Live, Musk made a disparaging joke about Dogecoin and, sure enough, Dogecoin’s value plunged.

Don’t get me wrong: I’m not suggesting that Musk is trying to manipulate the market for personal financial gain. A super-rich entrepreneur known for smoking marijuana on public podcasts is simply accustomed to following his whims. And if you invested early in the major cryptocurrencies, you’re sitting on some hefty gains (for now).

But my point here is that frenzied speculation, especially involving cryptocurrencies, is an ill omen for the broader stock market.

Read This Story: Beware of “Blank Check” Investing

Human beings are susceptible to blindly following conventional thinking until it takes them right off a cliff. That’s why our in-house experts give great credence to contrary investing, a method that entails bucking the herd mentality.

Contrary investing is the art of going against the crowd. This mindset works in any sort of investment market because human nature is constant everywhere. The sad fact is, many people (and that includes investors) are lemming-like followers, not independent thinkers.

I continually strive for objectivity and right now I’m wary of speculative excesses in the stock market. You should stay invested and enjoy your gains. But at the same time, beware.

If you haven’t already, take proactive measures to protect your portfolio. Under current market conditions, at least 15% of your portfolio should be devoted to hedges. As part of your hedges sleeve, about 5% – 10% should be in precious metals, such as gold.

Gold provides shelter during crises and rising inflation. The “yellow metal” has experienced a healthy run-up in prices over the past year and it has further to run.

I prefer gold mining stocks, which bestow greater potential for outsized gains than physical bullion or gold-linked funds. Gold mining is easy to understand. Crypto mining? Not so much. For details about a fundamentally sound gold mining play, click here now.

John Persinos is the editorial director of Investing Daily. You can reach him at: mailbag@investingdaily.com. To subscribe to his video channel, follow this link.