What is unique about this bubble is so many people are suspecting it. Traders certainly are. Media pundits absolute are talking about. Politicians are also mumbling about it. OK, so we are all talking about it, but what’s the point? We’ve all grown up in the age of bubbles, and for us they aren’t that rare anymore. Let’s see, first it was the Internet. Then it was housing. It might have been gold, and we certainly had one in cotton. So we’ve had a lot of experience. The point here, is for there to be a bubble, most of us would have to deny its existence. Here, few are denying it, so in reality there is no bubble.
So if there is no bubble, why does the market keep going higher? This is the exact behavior we get in secular bull markets. It’s not like the bulls are so strong here; they aren’t. The problem rests with the bears who have lost their nerve in light of the disasters they’ve experienced, starting with the European crisis in 2011. You’ll remember that was the disaster where equity bears ended up getting slaughtered, but forex bears made a fortune. From the peak in May 2011 the EUR-USD did not bottom until July 2012. As we know the stock market for the most part went the other way.
What damaged bears so greatly was what happened in the stock market. Go back to the 3rd quarter of 2011. It was the time of the first debt ceiling crisis and it was overlapped by the European crisis. What was the prevailing sentiment at the time? Didn’t people think the crisis would bring on a retest of the 2009 financial crisis bottoms? Think about it for a minute. That’s a big bet and this wasn’t just a bunch of private retail guys trading Uncle Bob and Aunt Mary’s money. This was institutional bankers and hedge funds. Billions were lost in a few short weeks. Careers could be made or ruined in a sequence like that. If you lost a few billion dollars, might you be a little gun-shy in the future?
That’s exactly what happened. Fast forward to the election of 2012. It’s only a year ago. Those of you who’ve followed my work for any length of time know we do a pretty fair job of being on top of market cycles, especially the most important ones. Last year was 261 weeks off the 07 top. Since the 07 top was also 261 weeks off the 02 bottom. Since cycles have as good as chance of working from low-low, high-high or high-low/low-high conditions at least in terms of the cycles were just as good as they were when the market originally peaked in 2007. Only this time bears pulled the plug early. You’ll remember it was about this time a year ago when Pelosi, Reid, McConnell and John Boehner posed for the cameras as they lined for the fiscal cliff battle. The market turned violently prematurely after a multi-week correction and really has never looked back. This year without fail, on every time window we’ve had the bears have taken a shot but instead of gaining any traction they’ve barely made a dent.
Everyone thinks the market continues to power higher because of monetary easing and to an extent that is true. But let us never forget a market is made up of buyers and sellers. If one side or the other doesn’t show up you get the obvious result. In this case it’s a slow drip, drip, drip higher. So what can turn this market around? I have the chart just for you. This is the NASDAQ and quite frankly, if this setup doesn’t do it, I seriously have to wonder what chart might do it. We first started presenting this chart in 2010 and again in 2011 as markets hit their peak. See the notation for the 1.61? I haven’t touched that annotation since I first posted the chart.
What this chart does is take that relentless and chaotic rally that ended in financial ruin and dwarfed it. Yes, when we take the period from the Internet bottom to a and measure off the 09 bottom we get the 161 at 4100. These 161 relationships are incredibly good forecaster for markets in all degrees of trends whether you are looking at a 1 minute chart or a monthly as we are viewing in this case. We are about 100 points away, aren’t we? To make things even more precise, last Thursday was the 5 year anniversary to the NDX bottom, another 261 weeks. You’ll remember the NDX bottom as the day the new President-elect Barack Obama nominated Timothy Geithner to be head of Treasury. Given Jack Lew’s attempt to bully the GOP in the recent government shutdown, I already miss Geithner. In reality the guy was given an impossible hand and did a fairly good job.
Next page: What can turn the market?