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.
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.