The exponential or parabolic or Hubbert phenomenon typically looks like this:
It occurs in nature and it occurs in the markets. Occasionally the exponential run up is followed by a flattening out at the top, to make an S-curve:
Source: Wikimedia Commons
But most of the time there is a collapse down the other side, fairly equal to the run up, and here are some examples of that:
Source: Chris Kimble
Apple is the world’s biggest stock by market capitalisation and now dominates the fortunes of the Nasdaq. Apple’s chart has gone parabolic over the last few years:
So is it due to collapse? Well, here’s the thing about exponentials: they can get steeper and steeper, putting on faster and faster gains. Recognising the pattern therefore isn’t enough, plus there is the possibility that a chart that has gone exponential flattens out into an S-curve rather than collapses. Typically, a parabolic that reflects a speculative mania to valuation excess will result in a collapse, whereas a parabolic that reflects genuine growth or fair value may flatten out.
In this next chart we can see that Microsoft was bid up to a forward p/e of 67 in 2000, compared to a historical average around 15. The new internet companies of the time reached 8% of the total US stock market capitalisation, the SP500 reached a p/e of over 40, and the Dow-gold ratio reached an all time high of just under 50. By various measures, it was clear the tech parabolic became a speculative mania, and a collapse followed. Of course, timing the exit from the parabolic was difficult – it only looks easy with hindsight.
As can be seen, Apple is currently valued at just a 13.8 forward p/e, which is cheaper than the historical average, and it is cheaper than the majority of SP500 companies currently. So whilst it has exceeded Microsoft’s capitalisation of 2000, it isn’t the same kind of speculative bubble.
The near term view of Apple looks like this. A correction is occurring, following a higher high on negative volume divergence.
That suggests it may correct further yet, and in so doing it is dragging down the Nasdaq. As the Nasdaq is usually the leading index, other indices are usually affected. So Apple’s fortunes are important. But Apple’s parabolic does not suggest a collapse as its rise is based on genuine growth and its valuation is still relatively cheap. Barring an economic downturn whereby all stocks are affected, I expect Apple to resume its uptrend post-correction, or to flatten in an s-curve if Apple’s growth starts to slow.
Turning to gold, we see the same exponential pattern over the last few years. At any point up the curve a trader could have called a top based on an unsustainable trajectory, but the curve just got steeper. The 9 month consolidation from 2011-2012 brought about bigger calls for a top, but again it appears to be resolving upwards into what should be an even steeper parabolic.
Assessing the parabolic for gold is more complex than for equities, because there are multiple valuation measures for gold as it fulfils various purposes from inflation hedge to hard currency to commodity. The publisher of that chart compares the percentage of assets in the gold sector as one measure. Certainly the 1% current position is not excessive compared to 26% in 1980 or dot com companies reaching 8% of the US market in 2000.
Valued as a reserve currency in the face of large monetary base expansion, its parabolic appears to reflect genuine fundamentals.
As a non-yielding asset that fares well when real interest rates are negative and declining, it has also been rising at ‘fair’ value.
However, when we look at its relative expensiveness to real estate or equities, it is into the historic extreme zone. Versus equities, it could yet become more relatively expensive to reach down to the 1980 level, but on this measure alone the gold parabolic does reflect some speculative froth.
Other ways to value gold include its relative price to food or broad commodities (due to close relations) and the proportion of its demand from investment (central banks and investors) versus supply growth. Drawing all together, I would suggest the picture for gold is one of a parabolic so far based largely on fundamentals, i.e. a genuine ‘growth’ based exponential rather than a speculative mania. However, I also suggest that this is likely to change ahead. I have argued elsewhere that yields should begin to rise now, that ‘investment’ demand for gold is due to top out in the next 18 months whilst supply is already growing, and that a whiff of policy change in relation to rates was enough in the 1940s to kill the gold bull (rather than requiring real rates to go positive). I believe we will get that whiff once we reach an inflationary spike next year.
I predict a speculative mania in gold will occur, based on historical mirrors, and we will then see the divergence from fundamentals that will bring about a huge run up followed by a collapse. But thus far, gold’s parabolic is not particularly speculative, and that does suggest that the Dow-gold ratio could reach 1980s levels before reversing. There is no easy way to time an exit from a speculative parabolic that has diverged from fundamentals, only to recognise it and then choose your weapon. That weapon could be trailing stops, or solar cycle timing, or technical indicators such as overbought/overbullish extremes together with negative internal divergences. But first, let’s look for evidence of transition from value parabolic to speculative parabolic.