Nasdaq

How much more parabolic can the Nasdaq go? I think it’s on borrowed time.

Here’s the biotech sector, which has been a key driver of the index’s outperformance this year, overlaid on the same sector’s performance into 2000:

11dece1You know the dot.com bubble story: ‘regular’ valuations were dismissed and ‘ potential expectations’ became more important than profits. Biotech is largely a sector that always has to be valued on expectations – so the recent rally is speculative, but not (yet) to the craziness degree of 2000.

Another hot Nasdaq sector of late is social media. Twitter up 6% yesterday and valued at $28 billion – yet it has no profits and is not expected to turn a profit until 2015 at the earliest. Facebook is now the 8th biggest Nasdaq company by valuation but trades on a tailing p/e of 128 and a forward p/e of 44 – again ‘justified’ by expectations. Linked In is valued at $28 billion and trades on a trailing p/e of 911 and a forward p/e of 118.

Amazon is the 4th largest Nasdaq company currently by market cap, but trades on a trailing p/e of 1405 and a forward p/e of 144. You get the drift – the same phenomenon as in the dot.com boom is being seen across a range of Nasdaq companies, namely of expectations-driven speculation. But here’s why I think the parabolic is on borrowed time:

11dece3 11dece2Up into 2000 we had a collective positive net investor demographic trend in the major nations aside Japan (first chart), i.e. a steady stream of new investors to the market. These investors then leveraged up to the max (second chart). Demographics also accounted for strong global growth into 2000 and increasing trading volumes.

Here in 2013, we see the same extreme leverage levels have been reached, but demographic trends of this era mean there are a dwindling number of investors, and this is reflected in declining trading volumes. Negative demographics also mean this is a time of meagre economic growth. In short, a shrinking investor population who are ‘all in’ against a poor economic backdrop.

Update

A last chart: the Nasdaq 100 in a tidy bull market channel since 2009 and a rising wedge over the last several months that looks ripe for resolution.

11dece4

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28 thoughts on “Nasdaq

  1. Just caught up on last 3 articles, scary. Especially that HY CHART. You mentioned the yield curve was not that relevant in a balance sheet recession. That was my belief, but the size of this bull mkt seems to contradict that. In Japan, since 1990, simply a cessation of improvement in the yield curve saw a renewal of the recession and bear mkt. I would have thought the large increase in long term interest would have had a larger negative effect. Interest rates bottomed over a year and a half ago, but the gap down and momentum down on bonds was over 6 months ago. They have been in a relief rally lately, but time should be running out.

  2. Jut looked at the solar cycle sunspot progresion. Looks like a possible double top. When I looked at the past cycles, a frequent pattern was a strong momentum rise from the bottom, a pull back followed by a secondary peak. Ie, just like now. Then when you look at bitcoin parabolics, russel 2000, we are peaking just as you’ said we would. In the last 60 year Gann Master Time Factor, the final rally in commodities began on Oct 9, 1953 and peaked in Apr, 1954 for 15 years. This most recent rally on the Dow started on Oct 9. I think you said the power was going into stocks, not commodities, this time. This rally also looks very much like the wall of the dome of three peaks and a domed house.

    1. Is the amount of money in the system less important than the amount of participants in the game? What happens to people’s money when they die =)

    2. Hi Robert
      We went to different schools together….. ignore the P/E.
      But the breakout was at 34000
      Buying at current price without some consolidation / accumilation is buying a Top and there will be a drawdown.
      There are some more rules to buying breakouts which I am sure you know.
      regards
      Bobc

    1. I think Facebook and Linkedin are expensive but at least they are making some money and people are actually using their products. Dot.com then nobody used the products and the cos did not even have revenue. Do not think too much just buy that break out chart trader. Gold does not have any profits or earnings =).

  3. double tops in the sunspot cycle are typically ~2 years apart, so the second top should be just about now, which fits with the major planetary cycles
    http://www.sibet.org/solar/index.html

    Probability of a crash in the winter?
    Many large corrections and bear markets began just around New year.
    Take for example 1953, 1960, 1962, 1966, 1969, 1973, 1977, 1981…

    The typical seasonal pattern is weakness in the fall, that sets up the winter rally.
    But if there is no weakness in the fall, market may be too overbought in the winter, not allowing a winter-rally… in the seasonal pattern inverts

    1. “The typical seasonal pattern is weakness in the fall, that sets up the winter rally.
      But if there is no weakness in the fall, market may be too overbought in the winter, not allowing a winter-rally… in the seasonal pattern inverts”

      Is this statement your feelings or do you have data that supports it. It is very logical and interesting but do not think it is a statistical valid theory. But if it is I would like to understand. Thank you Jan

  4. Robert
    It is based on visual observation and wave-theory, but I am pretty sure I can back this up by statistics.
    The principle can be viewed like this, and it has two outcomes (but only one showed here)

    If a wave doesnt swing down, it typically means one out of two things:
    -either it is a bullish consolidation, and shoots up
    -or it is two waves merging into one bigger, and a typical major topping formation

    It is also logical: if market doesnt retrace, the trailing stop losses are building. People get confident, and have bigger and bigger leverage. It is difficult to create momentum, except for bear-traps and short-squeezes.

    So this may still go two ways – either it is very bullish, and there is a lot cash waiting to join the winter rally (after a 5 year bull market). And any retracement here around New-year will be a bear-trap.

    Or the lack of retracement, and euphoric market in 2013, is creating a merging wave/topping, and there are no more buyers to create the winter rally, and just the trailing stop-losses waiting to get triggered.

    I guess I am looking for something in between… a bit sideways into the winter, and then down 🙂

    1. One of the formations that can be created in this setup, is the three peaks and domed house
      http://www.gold-eagle.com/article/three-peaks-and-domed-house

      A topping formation that doesnt break down, and the trailing stop-losses are not really triggered.
      Then a false breakout, where there is no real cash on the sidelines… so instead of real buying, people rather use the breakout to take profit, and the breakout fails…

      Seasonally the strongest momentum tend to be at year end and the winter, but if market is overbought and there is a lack of cash on the sidelines…

    1. When the chart looks like the bitcoin chart looks today I will start looking for bearish short positions =). Before that I keep taking longs =)

  5. And then we have Christmas rally =). And after than January… best month… small caps explode =). Funds take new positions after tax loss selling =). Not the cycle perhaps but real world facts =).

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