MBA FaceOff Blog

The Tape Never Lies

Christopher Myers

From Tuesday’s lows to Thursday’s close, the Nasdaq climbed an impressive 9%.  A reasonable person should ask themselves, “Is this sustainable?”  An old maxim seems to be appropriate to help explain this action: “In the stock market as in life, the road to the top comes by the stairs and the trip back down usually happens via elevator.”  The fact that we came screaming off the bottom goes against this philosophy and puts into question the validity of the move.

Sure, there are historical examples of such strong action off of a bottom.  Check out October 1998 when the Nasdaq came screaming off its lows following the Russian ruble crisis and the Long-Term Capital Management fiasco.  Times were different then.  We were in a raging secular bull market and any selling pressure quickly came off resulting in strong uptrends.  As the crisis was unfolding, the stocks that lead the charge to the July 1998 top cycled out and new leadership emerged (see AOL, ticker TWX, and Charles Schwab, ticker SCHW, between October 1998 and March 2000).  New leadership emerging is vital to a sustained uptrend and is something we are severely lacking in the current environment.

Today we are in the 11th year of a secular bear market.  The last secular bear the U.S. experienced was from 1966 to 1982.  A secular bear is characterized by relatively sideways trading and a compression of P/E ratios that wildly expanded in the prior secular bull market.  The average secular bear market lasts 16 years.  Keeping this fact in mind and combining it with analysis from Carmen Reinhart and Kenneth Rogoff’s book, “This Time is Different,” it takes 6-7 years to remedy a severe banking crisis.  6-7 years added to 2007-2009 would put us somewhere between 2013 and 2016, meaning this current secular bear could end in 2 to 4 years, lasting a total of 13 to 16 years.  Coincidence? 

You are free to think as you please.  I’m merely presenting this information to drive a single point: History never repeats, but it often rhymes.  Since we can’t know how closely it will rhyme, the action of the tape should be heeded at all times and in all environments.

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