Way back near the top in March 2000 the NASDAQ
composite index commanded an enormous
market-capitalization of $6,236b across 4,785 companies. By
December 2001 the NASDAQ’s market capitalization had
plummeted dramatically to only $2,817b comprised of 4,052
companies. Long-suffering NASDAQ investors, as a
pathetic group, had lost an astounding $3,419b or 55% of
their total NASDAQ wealth by the end of 2001! This
gargantuan number is extremely difficult to comprehend,
but it can be put into some perspective by realizing that the
entire M2 money supply of the United States of America
only crossed $3,419b for the first time in history a mere
decade ago in April 1992! Losing $3,419b is an unbelievable
and unparalleled feat of folly!
In addition to witnessing trillions of dollars of dreams
mercilessly vaporized, the brutalized NASDAQ faithful
watched in horror as 15% of the companies listed on the
high-flying index either careened into bankruptcy or were
unceremoniously delisted. With about 1 in 6
NASDAQ-listed companies suddenly going MIA or AWOL
since March 2000, it is amazing that the swarming hordes of
NASDAQ investors today are not more than a little bit
worried about the loose standards of the NASDAQ for
listing companies.
While the NASDAQ composite index lists and takes on
increasing amounts of cold water, the current state of affairs
in the market-darling NASDAQ 100, the mega-cap
“blue-chip” NASDAQ stocks, is utterly appalling. Although
the NASDAQ 100 only contains 100 companies, a mere 2.5%
of all the corporations listed on the NASDAQ, these
mammoths comprise about two-thirds of the total market
capitalization of the entire NASDAQ composite index. For
the most part, when people talk about NASDAQ investing
today, they are discussing placing capital at risk in the elite
NASDAQ 100 stocks.
At the end of January 2002, only a few short weeks ago,
fully 47 of the NASDAQ 100 companies were operating at
losses, a staggering percentage. Of the 53 remaining
companies that actually had some earnings, even if only
pro-forma flights of fancy, fully half, 26 of the elite
NASDAQ 100 members, had stellar price-earnings ratios
exceeding a mind-boggling 50 times earnings!
Excluding the 47 losers and not deducting their losses from
total earnings, the NASDAQ 100 had an unbelievable
market-capitalization weighted-average price earnings ratio
of 65.6 at the end of January! While the number has
exceeded 100.0 as recently as July 2000, it still remains
vastly overvalued. Fair value for a growth-stock casino like
the NASDAQ is probably between 13x-20x earnings,
nowhere near the current 66x level. Yet the NASDAQ is
still shamelessly hyped to investors like there is no
tomorrow!
From any conceivable way that one objectively dissects and
examines the NASDAQ, from all possible rational
perspectives, it remains enormously overvalued in
fundamental terms and ripe for continuing slides. The fact
to marvel at, however, is not that the NASDAQ remains so
grossly overvalued even almost two years into the bust, but
the frightening realization that NASDAQ investors are still
blinded by the strong delusions perpetuated by the
mainstream financial media that all is well and a major
NASDAQ rally lurks right around the corner.
After almost two years of abundant opportunities to dig into
the NASDAQ, study it in historical and fundamental
context, and make prudent decisions to evacuate capital to
protect from the evolving NASDAQ bust, sadly very few
investors have really taken the time to do their own
homework. Most current NASDAQ investors are
apparently quite content to throw their scarce and
hard-earned capital to the wolves. Since they have forsaken
so many abundant opportunities to sell in the vain hope that
they can wait until the fabled next mighty rally to
“break-even and sell”, it is almost as if NASDAQ investors
want to lose money.
Reading books on historical boom-bubble-burst-bust
episodes is incredibly interesting and educational, but there
is nothing quite like living through and witnessing a
once-in-three-generation speculative mania in equities with
one’s own eyes. The NASDAQ boom-bubble-burst-bust has
been extraordinary in scope and magnitude, endlessly
fascinating, scary at times, and always entertaining. We are
now blessed with the rare opportunity to witness in realtime
the subtle shift in general NASDAQ investor psychology
from naked greed to cold, dark fear.
While investor greed and fear are not easily empirically
quantifiable, anomalous boom-bubble-burst-bust
equity-index levels are certainly a reasonable proxy for
these tricky emotions perpetually warring in the hearts of
every single market participant. Nowhere is this more
evident than in classic boom-bubble-burst-bust graphs. Our
now familiar comparison between NASDAQ 2000 and the
infamous DJIA 1929 episode that I have been discussing in
these Zeal essays for most of the NASDAQ bear market
continues to look eerily accurate.
The spectacular
NASDAQ top on March 10, 2000 is matched with the lofty
DJIA top on September 3, 1929 and the daily closes of both
famous bubble markets are plotted-out from there in a
straight-up one-to-one fashion. While the match is not
exact, the overall rhyme and echoes of the historical 1929
bust in the current NASDAQ 2000 bust are absolutely
uncanny!
Following its September lows, in one of the worst and most
despicable recent abuses of the proud idea of patriotism,
Wall Street and its sycophants in the mainstream financial
networks shamelessly called on Americans to buy
overvalued NASDAQ stocks out of patriotic duty. Buying
something for more than what it is truly worth is foolish and
is bad for everyone, bad for both American investors and
general US economic might, with the notable exception of
the sellers, who were often Wall Street or corporate insiders
who made out like bandits selling aggressively into the
“patriotic” NASDAQ post-attacks rally. This nauseous and
vile “patriot rally” in the NASDAQ carried it to another
top right on trend of 2059 on January 4, 2002.
After bouncing off its top resistance line in early January,
the evolving NASDAQ bust is conforming perfectly to a
declining bear market sine wave and is heading back south.
It will probably slam into and bounce off of the bottom
support trendline sometime in the next couple months,
probably around an index level of 1100 or so. The white
arrows in the graph above show the probable NASDAQ
paths in the coming months and the lower black-dashed line
outlines the 1100 index level at which the NASDAQ will
probably bounce off the support of its well-defined
bear-market trading-range trend-pipe leaving yet another
lower interim bottom in its wake.
The more the NASDAQ chart is studied, the harder it is to
believe that anyone can be bullish on the intermediate-term
for the evolving NASDAQ bust! Being a NASDAQ bull
right now takes the deadly arts of wishful thinking and
willful delusion to their absolute pinnacles!
Then, when that strategic junction in time is reached, turn
on CNBC and buy whatever big-cap NASDAQ
market-darlings they are relentlessly hyping at the moment,
such as Cisco (8% of the total NASDAQ 100
market-capitalization), or Intel (13%), or Microsoft (19%).
These companies, of course, will still be vastly overvalued by
all fundamental measures and are like holding
radioactive-waste for long-term investors, but for a
short-term speculative play valuation is far less important
than market psychology, the intricate dance of general
greed and general fear.
After buying near the bottom trendline, all our short-term
NASDAQ speculator has to do is hold for a few weeks or
months until the NASDAQ once again approaches the top
trendline. Then sell without remorse with both hands!
Realize that one has to be a hardcore contrarian to pull this
off, as fear will be widespread at the bottom support line
when the NASDAQ is making another short-term interim
bottom so it will be very hard to buy. Also, when the
NASDAQ later hits the top resistance line the bullish hype
and greed will be overwhelming so it will take a strong
contrarian to sell out when everyone is proclaiming a new
bull market is being born.
So, yes, even in a brutal secular bear market after a bubble
like the current evolving NASDAQ bust, it is indeed
possible to play the bear market rallies and profit by buying
and selling market-darling stocks near the key turning
points of the trend channel. The primary risk born by this
play is that the trend will be broken, which can conceivably
happen at any time. Prudent speculators will deploy
strategic stop-losses to minimize the risk if the NASDAQ
jumps out of its trend channel rather than cooperating and
continuing to decline in a nice orderly fashion. |
