Lessons from the Past: The History of Financial Markets
Updated Dec 2022
If one studies the history of financial markets, one can clearly state that the masses learn nothing other than repeating the same mistake more efficiently. Trying to save them or make them see the light is futile, akin to catching a sharp falling dagger. A useless and painful experience.
Will history repeat itself?
This is what took place during the dot.com bubble. During the ride up, there were many instances where it appeared that the end was nigh. Those that shorted early in the cycle lost everything and then some. Shorting the markets is a very high-risk venture; when you do so, the following elements must line up. Bullish sentiment should be unusually high and remain at elevated levels for weeks on end. Everyone from your barber to your grandma should be talking about getting into the markets. Lastly, all the technical indicators should be trading in the insanely overbought ranges. If all the above factors line up, one can consider shorting the markets.
The Cycles of Greed and Fear: Lessons from the History of Financial Markets
Back to the topic at hand, the above pattern could be in play for the stock market. We are either at point two (66% certainty) or Point 3 (36% certainty). It is more likely that we are at point two. The masses believed the dot.com boom was over on each pullback. The selloff during the middle of 98 was the sharpest, and it looked like the end was nigh, but it was the precursor to the most explosive part of the move.
As there is 10X more money in the markets now, the upward feeding frenzy will/should last at least 3X, if not 5X, longer. When point 3 is hit, this Bull market should have enough oomph for another 36 months. A mega top is not likely until 2025 to 2026 and could extend until 2028. There will be many substantial corrections along the way up. A mega-top will probably coincide with Dow 81 to 102K, and then a correction in the 60% to 84% ranges is likely. Until then, the data indicates that every strong pullback should be embraced like a long-lost love; the more it deviates from the mean, the better the opportunity.
The spread between Junk bonds and Investment grade bonds is dropping fast, so investors are willing to risk more for less. Short-term, this is bullish for stocks. Overall, the bond market is projecting that rates will remain low for at least the next 12 to 18 months, with spikes in between.
Focus on Reality, Not Fear
Pay close attention to the above chart. Something interesting is taking place. Typically when an index moves to new highs and the number of 52-week highs hits a new low, it is viewed as a negative inter-market divergence. This is still somewhat true, but we have been monitoring this development for a while. In most instances, it illustrates that the big players push weak hands to dump top stocks without taking the indices down.
This maintains the illusion that all is well when it is not. An even more exciting development is that when the SP500 traded to new highs last week, over 330 companies on the NYSE put in new 52-week lows. This is double the number of companies that traded to new highs on the same day. This phenomenon occurred only three times (ever).
They all took place in Dec of 1999, according to Chief investment officer Ramsey of the Leuthold Group. And after that, we all know what happened, the dot.com bubble popped. But before it popped, there was a spectacular final feeding frenzy move. Bullish sentiment soared to the moon. Almost every index was trading in the Insanely oversold ranges. Grandma was now a stock expert on par with the best traders from Goldman Sachs.
Today (Dec 27th), there were 96 highs on the Nasdaq and 111 new lows. While on the NYSE, there were 134 new highs with 43 new lows. So, the SP500 is more robust now, but the Nasdaq appears to be building momentum for a strong finish. Markets usually crash when speculation runs rife, and Nasdaq’s code name is Speculator’s delight. We monitor the Nasdaq closely as it is likely to provide the first signal of a market top. Market Update Dec 27th, 2021
History of financial markets: Pay attention & Learn
These developments give further credence to the strong correction of next year’s hypothesis. It also adds weight to the silent correction hypothesis. Finally, it also supports the argument that the big players have so much money that they take delight in changing the narrative and the outcome. We stated that the markets would most likely experience two corrections next year.
One would be mild, and one would be wild. It is hard to determine in advance which one will come to pass first, for there are no free forces in the market. We must base most of our analysis on what the crowd is doing, pattern changes and technical analysis. We can confidently state that the sharp correction will provide Tactical Investors with another enormous buying opportunity. That is provided you don’t freeze. Many new subscribers and those who subscribe to our free newsletter now talk about how easy it was to buy stocks in 2020 and make money. Yet over 90% of them panicked and did not buy. Hindsight makes even a jackass appear to be a genius. Another opportunity will be provided, and let’s see if they act when opportunity knocks or if they allow fear to knock them out.
Focus on the big picture
One possible deviation could be that the big players change the narrative slightly. Here the indices experience a milder correction (milder, not mild) while specific sectors get smashed. Bitcoin and several components of the overall Hi-tech industry come to mind. In this scenario, everything is achieved in one shot while maintaining the illusion that things are not bad. A crash leads to a stampede, but if you crash a bunch of sectors, the cows continue munching on the grass as they assume the overall situation is under control. The action will be wild enough to give the Fed an excuse to, at most, raise rates 3 to 4 times (if that much) and then reverse course very rapidly. Most likely, they will raise rates once and then backpedal.
The Fed counts on the fact that the masses will not study the history of the financial market. If they did, they would realise that the Fed’s only function is to facilitate boom and bust cycles. The Fed is hell-bent on keeping this market alive at this game stage. They should have allowed natural market forces to rule back in 2009, but they stepped in to reduce the damage. And during the COVID crash, they went ballistic. So what the history of financial markets teaches us is that the Fed has now decided to follow this slogan; inflate or die trying to. Hence there is only one option/solution; every crash has to be viewed through a bullish prism. The stronger the deviation from the main trend line, the better the opportunity.
