Will history repeat itself? Interesting observation:
Jack,
I took the periods surrounding the series of three rate cuts from 98 and charted the NAZ from AUG98-DEC98. Then I compared that to a recent chart of the NAZ from DEC00 to present. While there seems to be some correlation, I would not want to see an exact repeat performance of the NAZ from back in 98. This is why:
Sept29, 1998: Fed cuts FF rate 25bps. NAZ is at 1730.
The week following the initial rate cut, the nasdaq tanks 22% to 1350. During that time, analysts and economists question the FED's credibility, timing, etc. Sentiment gets really bearish on economic outlook (Check Dale's article, dated Oct12, 1998).
detnews.com
Oct 15, 1988: Fed cuts another 25bps from the FF rate.
At this point, the NAZ had already retraced nearly 50% of the nasty move down. But this second cut in the FF rate was the real impetus for the nasdaq rally. The NAZ rallied for a month to the tune of 22% (1550 to 1890). From the low of the run after the first cut on Sept29 (1340), that is an eye-opening 40% gain (1340 to 1890).
Nov17, 1988: Fed shaves an additional 25bps off the FF rate.
This was the clincher for the NAZ. Just as the NAZ started to consolidate between 1850 and 1900, the FED pulls the trigger one more time, starting a rally that would not look back. Oddly enough, this event also helped to create a very important level of support for the NAZ (1890-1900).
While I would like to think that we could be setting ourselves up for the next big bull run, I keep thinking about that initial nasdaq tanking (22%) after the first rate cut in 1998. The big selloff didn't happen this time. Sure, we drifted down a bit, but that was only after the biggest point and % gain ever for the NAZ.
Will history repeat itself??
Well if we are going to see a repeat of the events of the easing cycle of 98, then we must test that important level of NAZ support at 1900 first before any long term rally can ensue. Why? This is why:
Keep the percentage numbers the same. This would imply that this time we would need to have a nasty selloff of a 20+% magnitude. So let's discount the knee-jerk rally on Jan 3rd (which appeared to be BS anyway) and say that from NAZ 2470, we crash 22% (like in Oct98). That would bring us very close to the critical support level I mentioned earlier. It would probably bring about some much needed capitulation as well, to give this market a real jump start.
Hell, I'm not saying that it will or should happen. Actually, I hope because of the different environment and circumstances, that we can just rally from here. But it's interesting to look back and see how events unfolded and then compare them in the present.
Food for thought anyway.
-B
BTW, I can't post the charts from here because I can't access my FTP site through the corp firewall. But I think I'm pretty close on the levels. |
