In the first chart below I
have included a weekly chart of the Nasdaq 100. Beginning at the 4-year cycle
low that occurred in October 1998, we can see that price rose sharply into
February 1999. In fact, in that 4 month period this index moved from a low of
1,063.74 up to 2,150.83. This was a 102% advance in only 4 months. As we
moved into October of 1999 this advance was much more modest, but still managed
to advance another 400 points during this time period and in doing so the
Nasdaq 100 had advanced 143% in a mere 12 months. As this move received more
and more attention more and more people jumped on the bandwagon with the
hottest tech stock. As a result, a bubble began to form. From the October low
at 2,299.95 the Nasdaq then advanced another 2,516. 39 points over the next 5
months. It was at this point that the advance went parabolic and in some 17
months the Nasdaq 100 had altogether advanced from the 1998 4-year cycle low
at 1,063.74 into the March 2000 high at 4,816.34 for a total advance of
352.77%. From that high the Nasdaq 100 fell back to 795.25, which totally
erased the entire move up from the 1998 4-year cycle low in which the dot-com
bubble began and I still remember people talking about the tech stocks and
why tech was back at the 2002 bottom. To date the Nasdaq 100 is still off of
its high by some 40%.
NDX Chart
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In another example of bubble
mania I want to show you a weekly chart of the Shanghai Index, which can be
found below. During the time of this advance in 2006 and 2007, the talk was
about China and their extreme growth. China, China, China. Every market that
was going up was because of China. I remember being at an investor's
conference and even there the talk was about China. If something was rising,
then it was because of China. I knew then that this was a sign of a bubble.
Anyway, as the general population began to be bombarded about China's growth,
investors flocked to their stock markets at record pace. From the 2005 low
the Shanghai Index advanced from 998.23 into its 2007 peak of 6,124.04, which
equates to an advance of 513.49%. This is yet another example of how a
parabolic advance unfolds. These moves begin as normal advances out normal
cyclical bottoms. But, if an advance is strong enough to begin to attract a
lot of attention, then at that point the herds begin to pile on board. It is
then that this massive inflow of speculation launches a move into a parabolic
state. A parabolic advance will continue as long as there is an inflow of
money to keep the move going. But, then at some point the inflow of funds
begins to fade and when it does gravity sets in. It is at that point that
price begins to soften. As price begins to soften the smarter money begins to
exit and prices begin to soften more. In the end all parabolic advances end
pretty much the same and the late-comers to the party are typically left
holding the bag. The decline into the 2008 low took the Shanghai down over
72% and to date, the Shanghai Index is down some 60% off of its top.
Shanghai Chart
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Next I want to show you what
may be the biggest bubble of the last 34 years and I bet that only 1
in100,000 people, or less, even know about it. The next chart below is a
chart of sugar. At the low in September of 1968 sugar was selling for 1.31
cents per pound. By January 1971 sugar had advanced to 5.32 cents a pound.
This was a 306% advance over a 28 month period. By December 1973 sugar prices
had advanced to 13.53 per pound, which accounted for a 932.82% advance from
the 1968 lows. But, there was still more in this case as this is the point in
which the parabolic price spike began and sugar finally peaked at 66 cents a
pound in November 1974. This bubble had then advanced 4,938%.
But wait, at the time this was
not viewed as a bubble. There were "reasons" to justify such
advance. I found an article about the rising sugar prices in the early 1970's
and I thought that you might find this quote of interest.
Sugar Chart
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"By the end of 1972,
there had been four straight sugar seasons with record crops. Yet consumption
actually outpaced supplies in 1972, literally eating into sugar inventories
over the next year. The
1973-74 sugar season began with extremely tight supply conditions worldwide;
demand continued to rise." There were no stockpiles of sugar. Sounds
to me like we had hit "Peak Sugar."
The article goes on to say, "There
was evidence that some big industry users were stockpiling sugar in
anticipation of higher prices. Soon people were grabbing sugar off the
shelves in armloads to offset rising prices. Others were grabbing cubes off
restaurant tables for home use. Dinner guests were arriving with five-pound
bags of sugar instead of the traditional bottle of wine or bouquet of
flowers. Even people who had never given the sugar futures markets a moment's
thought knew something was up when they walked into the local coffee shop and
noticed that the sugar had vanished from the table. Quite simply, global
demand for sugar had exceeded supply, and before long the price of sugar
headed for the roof.
"Everyone had a theory
for the high prices. Sugar traders had no idea where prices might be when the
US's long-standing price supports expired at the end of 1974; some blamed the
high prices on a 'scarcity of cheap labour to harvest sugarcane'; others
pointed to the failure of the European sugar-beet crop. Others even suspected
that both the Soviet Union, which had just suffered two bad production years
in a row in its own sugar crop, and 'Arab oil money' (remember that oil
crisis of the 1970s?) had moved into the sugar futures markets, along with a
rise in speculation by others looking to make money from rising prices."
This reminds me of what we
were hearing about oil in 2007 and into 2008. There is always a so-called
"reason" for these parabolic advances. But, fact is, they are still
irrational parabolic advances that tend to retrace the entire parabolic
advance. As you can see on this sugar chart, by 1977 sugar had dropped back
down to just over 6 cents, erasing the entire parabolic advance. Into 1980
there was a rebound move that also went parabolic and by 1985 sugar prices
had dropped to 2.3 cents per pound, erasing that entire move.
Now I want to show you a
weekly chart of crude oil, which is the next chart below. Many of you may not
remember, but in December 1998 crude oil touched $10.35 per barrel. I
remember buying gasoline in December of 1998 for 68 cents a gallon. Between
1999 and 2001 there were major longer-term cycles bottoming in most every
commodity. As price began to advance out of these naturally occurring
cyclical lows no one gave too much thought to them. But, as price began to
move up, commodities drew more and more attention. This in turn drove prices
higher and higher and higher. As we moved into 2008 the advance in crude oil
had become parabolic and finally hit an all time high of $142.99. As prices
advanced, just as with sugar, people began to say that it was for this reason
and that. Some say that it was because of the weak dollar. If that's the case
then why is it that oil was trading in the 14 to 20 dollar range between 1992
and 1995 when the dollar was trading in the low 80's, which is basically
where it is now. Others say that it was "Peak Oil." The bottom line
was that it was a parabolic move that drew the attention of the public just
as sugar and the dot com mania did and it was fueled by the stories of
"Peak Oil", a "weak dollar" and "China." As a
result, people began to jump on the hottest trend and the normal advance was
transformed into a parabolic mania. It is that simple. Also, as with any
parabolic speculative driven advance it was the Johnny-come-latelys who got
burned once the inflow of speculation began to fade. In 7 months crude oil
dropped over 77%. I believe that the rally we have seen since the 2009 low is
the typical rebound rally that follows the collapse of any parabolic move.
Crude Oil Chart
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Now, this brings me to Apple
in the chart below. Here too, this is a parabolic advance that will
ultimately end just like all the others. When it does, the consequences will
not be limited to just Apple. The parabolic portion of a move is kind of like
shooting an arrow straight up into the sky. At first the move is hard and
fast as there is plenty of energy and momentum behind the move. But, at some
point the momentum begins to fade. There is then a point in which the arrow
sort of hangs in the air as the fight between the last remaining bit of
forward momentum competes with gravity. This is the point in the speculative
mania in which the masses are "all in." At that point, the masses
have committed themselves heavily and there are not enough new speculative
buyers to keep prices rising. This is when gravity takes over, the arrow
rolls over and picks up moment to the downside. I do not yet know if we have
reached that point with Apple, but I suspect we may be close. The first
opportunity for us to reach this point will come once an intermediate-term
sell signal is triggered in association with my cycles work. Then, first
indication that the parabolic advance is over will come once an
intermediate-term sell signal evolves into the annual cycle top. At that point,
many will think that it's just a healthy correction. But, if the buying
doesn't come in very quickly at that point, then the parabolic move will be
over and the top will in place, the decline will accelerate and the parabolic
advance will begin to deflate even further. If this occurs in conjunction
with the proper setup to cap the bear market advance that began at the 2009
low, the fallout from this will not be limited to just Apple. So, as I watch
for indications of the top in Apple, I'm also watching for evidence that is
suggestive of the top in the broader market as well. Such evidence should
come from the cyclical structure of the market, the statistical data and the
DNA Markers that have been seen at every major top since 1896. If these stars
all line up, then it "ain't going to be pretty." If they don't line
up, then the broader market advance will limp along.
Apple Chart
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