Excellent post, even though I'm not sure I understand it all. What I really want to figure out is what signal or combination of signals indicate the bubble is prepared to burst. It seems that you have a pretty good handle on some of them.
I think the bathtub analogy is a good one. In case you haven't heard it: At the beginning of the bull market, the drain is plugged, and the tub begins to fill. The smart money is the first "water" to go in. The tub fills as the bull market continues, attracting more and more "water". The "dumb money" is the last to come into the tub, as the tub is nearly full. When the tub is full, the drain plug is pulled. "water" may continue to flow in, but it will be flowing out faster, and the tub level decreases. The "smart money", being the first in, will be at the bottom of the tub, and will be the first out. The "dumb money" is at the top of the tub, and will be the last out, suffering huge losses.
I am of the opinion that the tub is nearly filled at the present. In my analysis of the past several years of the market, one indication has held true for determining peaks in the market indices. That indication, is the percent over the 200 day moving average for the NASDAQ composite. I found that every time the index moved 15% or more above the 200 day MA, a correction occured shortly thereafter. The index did move up considerably more than +15% on a couple of occasions (to 20 & even to 23 once), but once the index crossed the +15% area, it was doomed to eventually retrace itself all the way back to the MA line. In the case of a bear market, the index would fall through the line and eventually turn the line south.
With this in mind, currently the NASDAQ composite 200 day MA sits at 1650. We are currently at 1880 (+14%), but recently hit 1920 (+16%).
It is conceivable that the index can make it to 2000, particularly if we move sideways for a period to allow the MA to come up. I am moving equities into cash gradually, and will hopefully be close to 80% cash before the bubble bursts.
Terry W. |
