Parabolic Collapse for Stocks Dead Ahead?
Bear Market Rallies are sharp, short, and usually retrace about 30% to 50% of the preceding decline, please see: “Characteristics Of A Bear Market Rally” (https://markonomics101.com/2018/10/17/characteristics-of-bear-market-rallies/). Sound familiar? Typically, they last no more than a day or two. If you blink, you might miss it completely.
Bear market rallies present opportunities to unload unnecessary risk but alas, they also temporarily raise the hopes of those who are likely to hold all the way to the market’s ultimate low. Mr. Market loves to offer investors “Double or Nothing?” He knows they end up with nothing.
Stock market patterns have some very odd statistical quirks that separate BULLISH from BEARISH phases. For example: Tops usually take MONTHS to form with some indexes peaking early and some late. (https://markonomics101.com/2018/10/02/is-the-stock-market-schizophrenic-or-bi-polar/). The aptly named “Four Horsemen of the Nasdaq Collapse” (Apple, Amazon, Google, and Microsoft) (https://markonomics101.com/2018/08/23/tipping-point-part-2-the-four-horsemen-of-the-nasdaq-collapse/) were the last to run out of gas.
Are the Four Horsemen Headed to the Glue Factory?
The Horsemen’s combined market value approached $4 Trillion last month. By comparison, Germany’s GDP, number 4 in the world, is $4 Trillion (https://en.wikipedia.org/wiki/World_economy). The ENTIRE combined value of the 4000 companies listed on the Nasdaq market was only $4 Trillion as recently as 2012 (https://www.macrotrends.net/stocks/charts/NDAQ/nasdaq/market-cap). That should scare you.
While Major Market Tops often seem to consist of endless churning, significant bottoms are very often swift and literally end in a selling crescendo. The bottoms are often V shaped and the “changing of the guard” occurs in what seems to be an instant. When a “major market” bottom DOES finally occur, it “looks” like all those Bear Market Rallies reversals that preceded it. So how do we distinguish between the two? For one, true BEAR markets NEVER bottom until stock values become materially “cheaper” than they were before. And two, not before lots and lots of investors get carried off the playing field on stretchers. It’s early. This game is in the first inning.
There is a reason for the best piece of advice we can give: “Take your money off the table before the table takes your money off of you”.
Another odd factoid in the statistics is that Bear Markets patterns don’t exactly conform to the “bell curve” that statisticians love so much. Moves in Bull markets are typically smaller in size on average. In contrast, the odds of larger percentage moves are significantly greater in Crashes and Bear Market Rallies. This makes hedging risk costlier because of the imprecision of measuring the potential for changes to occur. For math geeks like me, this is called “fat tails” or “kurtosis” in the tails of the bell curve. Kurtosis is not fatal.
The Beginning of the End or End of the Beginning?
Below are 5-year weekly charts for the Dow Jones Industrial Average (Dow), Nasdaq 100 (NDQ), Russell 2000 (RUT), and the Standard & Poor’s 500 (SPX). The patterns are identical and ominous. The Dow needs to hold above support at the 23,500 level, where it bounced off of in the Spring. Failing that, the next stop is 18,500 or MINUS 30%. The NDQ has exposure to 4800 or 35% below yesterday’s close. The RUT is vulnerable to 1275 or 30% lower and the SPX has another 20% to lose before it finds strong support at 2200.
These lower support levels are hardly guaranteed to hold or stop the BEAR. Yes, the values may be better, but nowhere near “cheap” on any kind of historical basis. In fact, if interest rates rise to anything approaching average levels of 6%, stocks may not be a better value at all.
Parabolic Uptrends Portend Huge Collapses.
Wasn’t it Markonomics101 that first said that “Those who do not learn from history are doomed to repeat it?” I’m not sure, but let me repeat that forgetting history can be very costly, especially now. A picture is normally worth a thousand words. The one below can save your skin.
One might call the chart below “Double Bubble”, but I’d advise anyone to pay careful attention. The “Dot Com Bubble” was a mere burp compared to the “Tech Bubble” or “Everything Bubble”. Very few, if any chart patterns are as reliable as Parabolic. The hangover will likely create financial carnage so great that it could be a generation defining event.
The smaller “Dot Com” bubble wiped out 85% of its peak value in two years. It would be plain stupidity to dismiss the possibility of a similar loss directly ahead. While nothing in markets can be forecast with certainty, this parabolic pattern occurs with amazing frequency. It always results in tremendous disruption to the economy, losses to greedy investors, and a long period of recovery. In fact, I am unaware of a single exception going all the way back to “Tulip” mania.
The markets remain in Ultra-High Risk mode and should be avoided like the plague and plaque (https://markonomics101.com/2018/09/22/mr-market-and-ultra-high-risk-for-equities/.)
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