The Stock Market’s Wile E. Coyote Moment?
For anyone who is a first-time reader, it would certainly be a valuable exercise to review our prior two posts: “Parabolic Collapse for Stocks Dead Ahead? (https://markonomics101.com/2018/10/19/parabolic-collapse-for-stocks-dead-ahead/) and “Characteristics of Bear Market Rallies” (https://markonomics101.com/2018/10/17/characteristics-of-bear-market-rallies/).
Just like the most optimistic and determined character ever created, Wile E. Coyote, virtually every stock market in the world is somewhere between being suspended in mid-air for a brief “Oh No!” or has pushed the down button of its elevator and is just beginning its acceleration downward. What makes the current situation so horrific is that the trajectory looks nearly identical to every asset and financial bubble that has preceded it. There is absolutely NO REASON to believe this outcome will be substantially different or better.
Parabolic Uptrend Lines First Among Cryptocurrencies in Early 2018.
The Parabolic Uptrend Line is a frenzied, euphoric acceleration in price, often resulting from “crowd madness”. The “Fear of Missing Out” or the instant riches of the “Next Big Thing” entice the truly greedy. The false hype has never been greater than it was for Cryptocurrencies. Now, largely invisible and unspoken of, their ascendance to world financial domination went completely unquestioned by its believers.
The Cryptocurrency Sector enjoyed a very generous market capitalization, hitting its peak in early January of THIS YEAR, 2018, at $825 Billion. It then lost a staggering 67% over the next 30 days (https://coinmarketcap.com/charts/). The low point SO FAR of market valuation has been about $195 Billion, a 77% discount from its “after Christmas” sale. It still remains to be seen as to the timing and levels of the ultimate lows.
A chart of the Total Market Capitalization of Cryptocurrencies is below and underscored by the unmistakable Parabolic Growth Curve in Red. Once the “crowd madness” is over, the gains are given up so swiftly that only those that sold EARLY will do so at a profit. Rarely, if ever, does that happen.
Parabolic Uptrends All Over the Stock Markets in Late, 2018.
The Nasdaq 100 (NDX) and Dow Jones Industrial Average (Dow) are both in, what appear to be, either the terminal stages of the “Everything” Bubble or the early stages of the “Everything” Bubble’s collapse. The “Dot Com” Bubble, which peaked in early 2000, resulted in an 85% peak-to-trough loss in the next 2 years.
If anything, the potential for outsized losses may be even GREATER today than back then. The “Everything” Bubble has encompassed: Cryptocurrencies, both major US Stock markets, Bonds, and Real Estate over an unprecedented 9 1/2-year period. By comparison, the “Dot Com” Bubble was far less inclusive and of a much smaller scale.
What’s most important of all, is the bulk of those losses is yet to be suffered!
Are the Crashes of 1929 and 1987 Indicative of Today?
The scale of the preceding advance DOES seem to be a factor in the severity of the subsequent collapse. In the 8 years prior to its peak in late 1929 at 386, the Dow had begun its journey at 63, registering a gain of more than 500%.
The Dow hit bottom in mid-1932 at about 40, wiping out that entire 8 years of “Roaring 20’s” advance and then some. Its peak-to-trough loss was just under 90% in 2 1/2-years. The chart below is from a blog called “Afraid to Trade” (http://blog.afraidtotrade.com/looking-back-on-the-1929-stock-market-crash/).
As the chart shows, the Dow was in a multi-year Parabolic Uptrend which was broken just before the Crash. The bulk of the losses took place after the Crash.
The Stock Market Crash of 1987 occurred under circumstances that were far different. The scale of the final advance was much less, at 113%, and transpired in just under two years. The chart pattern does not bear the signature Parabola. The Crash itself marked the ultimate low and brought the drawdown to about 40%.
“Everything” Bubble More Like 1929 Than 1987.
The advance in equities began in early 2009 following the mortgage crisis and financial panic. Since then, the Nasdaq has registered gains of 675% to its recent peak. The Dow’s advance stands at about half that, or 315%, in the same time frame. This makes the 1987 Crash not particularly useful in assessing the situation as it stands today.
Sometimes called manias, the virtually identical behavior has been recorded for centuries, beginning with Dutch Tulip Mania (https://en.wikipedia.org/wiki/Tulip_mania) in the 17th Century. Whether they become knowns as bubbles, manias, or Parabolic Uptrends, they ALWAYS result in the near, or total loss, of whatever early gains were created.
Higher Interest Rates Make the Prospect for Extreme Losses Even Greater.
The amazing chart below comes from Bank of America/Merrill Lynch. Bubbles tend to form when interest rates are held artificially too low for too long, thus encouraging excessive speculation. They tend to burst when that policy is reversed, also known as a “tightening cycle”, as would be the case presently (https://markonomics101.com/2018/10/07/asset-bubbles-start-popping-as-interest-rates-surge/).
Central banks, and their monetary policies are often a large component in both the creation of, and bursting of, asset Bubbles. Policies of keeping interest rates too low for too long produces an environment conducive to the formation of speculative bubbles. Once those policies become more restrictive and interest rates rise, asset bubbles have a greater tendency to burst.
Japan’s Real Estate/Stock Bubble.
In the late 1980’s, the future “belonged” to Japan, not the United States. Within a few decades of nearly being destroyed in World War II, Japan soon became the second largest economy and stock market. The Japanese stock market, called the Nikkei 225 Index, peaked at about 40,000 in late 1989 after an incredible run up in both real estate and company “values”, as pictured below.
The Bank of Japan’s accommodative monetary policy was the key culprit behind producing possibly the most overinflated Bubble in history, in both real estate and stocks at the same time (http://www.thebubblebubble.com/japan-bubble/).
Once its Parabolic Uptrend was broken, the Nikkei lost 50% in a couple of months. It ultimately lost 80% of its peak value and remained in that range for years. The bottom at 7000, brought the index all the way back to its 1981 level of 7000. Today, nearly 30 years later, the Nikkei has still NEVER fully recovered and stands at 22,000, about half its Bubble Highs.
The Psychology of Investing During Bubbles (https://markonomics101.com/2018/10/08/the-psychology-of-investing/).
Parabolic Uptrend Lines reflect the emotional illogic that we as mere humans are all subject to. Controlling those emotions and retaining objectivity are critical to attaining any success in investing. Luck doesn’t hurt either.
Once any asset shows itself to be in the grips of the Parabola, they attract the greediest among us, often referred to as “dumb money”. You can’t get rich quick unless the stock is going up quick, as in parabolically. Just as we can bet that Charlie Brown will never kick the football before Lucy snatches it away and Wile E. Coyote will never catch the Road Runner, we can be pretty certain that trading a Parabolic hyper advance will never get anyone rich quick.
Based on experience and history, the best strategy is to sit out the dance as soon as the frenzy is identifiable. Taking profits early is NEVER a bad idea. Of course, you will have to live with the fact that for some period of time, you will watch as others get “rich”, pat themselves on the back, and spend it as if they have 100% confidence that the profits will only grow.
Because the collapses can be so financially devastating, it is critical to mitigate one’s own risks, as soon as possible, using the game plan in “How To Survive and Prosper In The Coming Bear Market” (https://markonomics101.com/2018/10/09/how-to-survive-prosper-and-thrive-in-the-coming-bear-market-part-1/).
Once the Uptrend’s nearly vertical ascent is exhausted, there is NO ONE left to buy. That is why the initial plunge is so severe. All the “dumb money” is in. Obviously, nobody can be CERTAIN of the outcome which will occur, but there’s nothing wrong with cashing in your chips, earning a T-Bill rate for a while, and waiting for REAL opportunities.
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