Interesting technical take in Barrons this weekend — Looking for the clues of a topping process:
“As always, one of the simplest ways to glean clues about the market is to find past instances where market action had been similar and compare those trends to the current period. It is no surprise that a good deal of analysis is dedicated to comparing the bear market of 1990s Japan to the Nasdaq blowout over the past few years. Ian McAvity of Toronto-based Deliberations Research, takes this one step further by overlaying busted bubbles in gold in 1980 and the dollar in 1985 with the Japanese stock market of 1990 and the Nasdaq since 2000. Result: The price action in these post-bubble periods lines up remarkably well, despite the wide range of assets involved.
McAvity says the initial rebound from a crash tends to top out a year or less after the bear market lows; currently, those lows can be pegged to March 2003. That was when most of the world’s stock markets found their lows.
This busted-bubble model suggests a mid-2004 top and then a post-election drop back to the old lows, possibly even lower, and finally a rebound in 2006.”
We previously mentioned Walter Deemer of Market Strategies and Insights, as a sage observer of markets (He was interviewed in Barron’s in February). Deemer believes that “the typical rally after a busted bubble is 50% to 100%.” As of the Nasdaq’s January 2004 peak, the index was up 94% from the October 2002 bottom. That fits right in Deemer’s range. (Pretty good call).
Deemer’s current view?
“It now seems clear, given the January-March break in the Nasdaq, that the cyclical bull market’s strongest phase — the broadly-based advancing phase — has ended. This means the advance will get more and more selective from here on in, and it will now be possible to lose as much — or more — in the bad areas of the market as can be made in the good ones.”
The year-long rally may be ending. Which stocks will hold up, and which will slide?
Barrons, April 12, 2004