This Gold Bubble Has a Disturbing Secret Message for You

Today, I'm doing something a bit unusual.

Instead of our usual LAMPP update, I'd like to take a different tack... and show you a historical picture lesson that should scare the stuffing out of you.

Recently I've been thinking about the similarities between the current stock market environment and a few of the bubbles that I have experienced in a lifetime of following markets. While those similarities are scary, they prove nothing. Just because two different periods in different markets look alike doesn't mean that their denouements will be the same.

By the same token, to ignore the similarities and the warnings they represent would be foolhardy. So today I am showing you the pictures of several modern bubbles, starting with a recent and disturbing one in gold.

Maybe that's not enough to scare the bejabbers out of us, nor perhaps should it be, because there may still be time to watch and take action deliberately. If you have been following my recommendation to gradually liquidate your stock holdings and raise cash over the past four months, and the current three months if you started late, then you're in good shape to ride out the storm that I expect.

But the message in these charts is that maybe there isn't as much time as we think.

Here's the gold bubble - and several others - that tell you what you need to know...

Today's Stock Market Is Eerily Similar to These Past Bubble Blowoffs

The first thing to know is that all of these bubbles ended in crashes. Some occurred within weeks. Others followed in months. So any market that looks like this needs to be taken seriously. The other thing that they have in common is that they occurred in the late stages of bull markets that had lasted for years, just like today.

First let's look at the gold charts.

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Gold had five waves up in the last 100 weeks of a 10-year bull market that ended in 2011. The move stayed within a constant percentage width channel. The angle of ascent steepened in the fourth and fifth waves, but the final thrust ran out of momentum before reaching the top of the channel. The final wave lasted 11 weeks. It accelerated for three weeks in the middle of the move.

What came next was a mini-crash right off the second high of that move. It lasted just three weeks and dropped just 20%, but that was the start of a 38-month bear market that lopped off 41% of gold's 2011 peak.

Next, we'll examine the final blowoff of the Japanese stock market bubble in 1988-89. The Nikkei's last move was 100 weeks from the preceding intermediate low. It lost momentum over the last 15 months, but overall the move had a stunning gain, rising 86%. There were three distinct waves up. The last wave lasted either 13 or 23 weeks, depending on where you mark the launch point.

What followed wasn't just a crash, but a secular bear market that lasted 20 years and lopped 81% off the Nikkei's peak value in 1989. The initial crash began seven weeks after the 1989 market peak. The Nikkei lost 27% of its value from peak to the low of the initial crash. That crash lasted just seven weeks. After a two-month dead cat bounce, the crash resumed, with a loss of 40% over nine weeks. That was only the beginning. This chart depicts the first two-and-a-half years of that secular bear market.

The next example is the Internet/tech bubble of 1999-2000. That blowoff could only sustain itself for 74 weeks from the last significant intermediate low. It stayed within a constant percentage width channel. The move had two distinct waves up. The final wave lasted 21 weeks with interim consolidation. It accelerated over the final four weeks and ended when it reached the top of the channel.

The Nasdaq began its initial crash a mere three weeks later. In 12 weeks following its high, the Nasdaq lost 40% of its value. The bear market lasted two-and-a-half years and lost 78% from high to low.

The 1986-87 stock market blowoff had three waves up lasting 100 weeks from the intermediate low that followed the last significant correction in 1986. The bull market was five years old at that point. The last of the three waves expired after 13 weeks. The angle of ascent on a log scale chart did not steepen.

The 1987 crash followed six weeks after the August 1987 peak. It was one of the worst crashes in history with a drop of 41% from the pre-crash peak to the crash bottom. But among all modern crashes, it had the best end result. Prices recovered in two years to kick off the great secular bull market that lasted until the Internet bubble blew its top in 2000.

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Finally, crude oil had a bubble in 2007-08 that lasted 77 weeks. It was the final blowoff of a six-and-a-half-year bull market. It had three waves, which kept accelerating. The final wave accelerated on a straight line through the upper bound of an equal percentage width channel.

That market crashed immediately from the highs, losing 78% in six months. That set the base for the next oil bull market that lasted until 2011 and lingered near the highs until 2014, when it crashed again. The oil market never exceeded that 2011 high.

Stocks are not like oil, you say? Perhaps, but not if we consider what happened in Japan from 1989 to 2009. Consider also that the Bank of Japan invented QE during that era. Despite massive money printing, it never was able to stem the secular bear market until both the Fed and ECB started their own QE programs in 2008-09. Once all three central banks were pumping, that was enough to inflate the markets and bring us to where we are today, which looks like this.

This move comes in the context of a nine-year bull market. This is no young bull, and the Fed and its cohorts are ending QE. The Fed is even pulling money out of the system. It's a hostile monetary environment for the markets.

Like the bubble examples above, this comes after years of rising markets that ended in froth and ultimately tears.

This move is different in one way. Unlike all the others, this move has actually accelerated over the past 16 weeks. That's unprecedented after such a long advance.

The chart shows three waves up at increasing angles of ascent since the last intermediate low preceding this move. The last leg went increasingly parabolic over 15 weeks. You can also discern a five-wave sequence that looks similar to the 2010-11 gold chart.

There are many similarities here to past bubble blowoffs. That doesn't prove that this time will be the same, but there's certainly no reason to believe that this time is different either.

You know where I come down in this debate. I have laid out the case for months for what I believe is the coming bear market. I may ultimately be proven wrong, but the facts and logic are there to support the thesis that a bear market is on the way.

I am beginning to waver on one thing. I have long felt that this market would take its time making a top and that there would be time to get out before the top devolves into a bear market with a potential crash somewhere along the line.

The evidence of these charts suggests otherwise, especially considering the extreme nature of the past four months of the current move. There may be little time to get out before that first plunge lops off 20% to 40% of your portfolio value.

Since September, I have consistently recommended a gradual and systematic program of selling to raise 60% to 70% cash (more or less depending on your personal circumstances) by the end of January. This is it - H hour. For late starters, I recommended getting to that level of cash by the end of March. At the very least, I would stay on that path. It may even be wise to accelerate that timetable.

Forget the pundits, the charts, the technical indicators. Knowing when to buy and sell comes down to one thing: liquidity. Lee Adler's job is to help you track it. Twice each week he updates Lee Adler's Sure Money readers on where the money’s moving and whether it’s time to buy, hold, or sell. You can get Lee's insight yourself by clicking here – it's absolutely free.

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About the Author

Financial Analyst, 50-year charting expert, finance + real estate pro, and market analyst; published and edited the Wall Street Examiner since 2000.

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