Market tops display similar characteristics. This one exhibits many of the same traits seen at tops in 1966, 1987, 2000 and 2007. Here in no particular order are some of those traits.
Social mood is wildly optimistic. Indeed sentiment indicators set new records not seen in decades. And when the President of the United States touts the stock market in the State of the Union message, that is not a buy but a sell signal. When the stock market becomes front page news in non-financial publications a top or bottom is usually at hand.
Markets take on a parabolic look as the indexes go vertical. Extreme expressions of social mood occur near the end of a trend. This explains the vertical ascent of Bitcoin as well as the major indexes. The Dow Industrials gained 1,000 in a record seven days recently. Now the index has set a record in the other direction losing over one thousand points in one day.
Fools rush in. Discount brokers saw new account openings swell some 40% in 2017. That was the 8th year of the move up from 2009. The ‘Fear of Missing Out,’ ‘FOMO’ causes new, inexperienced ‘investors’ to rush in at the wrong time. The same thing was seen in developing markets like China.
This column, Friday February 2 2018 (Began Tuesday Feb 6, amid Pre Market Trading)
We have consistently warned that the Dow Industrials DJIA were some 4,000 points above its widely watched 200 day moving average. Even with a 250 point sell-off this morning the DJIA is 3,500 points over its 200 day MA.
Investors focus on a particular group of stocks believing the trend will last forever.
- 1929 – Yes tech stocks then led by Radio Corporation of America RCA
- 1960s – The Nifty Fifty
- 2000 – Dot.com Mania
- 2007 – Housing Boom, Mortgages
- 2017– Facebook, Apple, Netflix, Google, Priceline
Jason Zweig in the Wall Street Journal muses that no one knows the reason for these sudden reversals. Yet an accountant named Ralph Nelson Elliott in the 1930s proposed a framework that answers just that question. Elliott made the case that social mood drives markets in a three steps forward, two steps back fashion. This pattern exists in smaller and larger fractals. But once the largest fractals have completed the patter, the markets reverse. This is likely the case now.
Fundamental analysts like Mr. Zweig dismiss the idea of cycles but they are present in nature (four seasons) as well as human nature.
Short term, we should have a corrective move up beginning Tuesday. Indeed that occurred this afternoon (the previous sentence was written this morning) at the low of 23,778. The market closed at 24,912. This fourth wave should extend to the area of 25,400-25,500. This will falsely restore some short term confidence. Look for a ‘whew, glad that is over,’ mentality to set in. This should occur by Thursday if not late Wednesday.
That high should be followed by a final fifth wave down by the end of the week or early next week. After that, expect a spirited move up in A, up B, down C, up fashion. If that move fails to take out the previous highs at 26,600, the bull market from 2009 is likely over.
Next update this weekend, in the mean time check out: http://www.themarketperspective.com.