Wednesday, February 20, 2013

Naz vs financial bubble

Many analysts like analogs and I admit I like them too. In writing a recent Barron's Online column on financials, I looked at how that bubble compared to the one before it and saw something interesting. Unfortunately, it was left on the cutting room floor. Here is what I wrote fleshed out a bit more.

Before looking at the chart, I have to tell you that the time frames do not line up. In other words, the tech./Nasdaq collapse in 2000 took about 2 1/2 years and the financial collapse in 2007 took only 1 1/2, both rounded a lot. Therefore, in order to get the ebb and flow to match, the data for one of them is stretched to fit the other.

The point is not to say they are following the exact timing but rather they are following the same structure. Is this how bubbles work? I don't know and honestly I am too busy trying to earn a living (journalism deadlines) than pursue this all the way.

But it is interesting.

So what is in the chart? Basically, the financial bubble recovery, based on what the Nasdaq did, "should" have already peaked. I'll blame the government for prolonging this thing with QE/TARP and all the other money they threw at the problem instead of letting the free market clean its own house.

Think about the broad market back at new highs. What 2007-2009 bear market? But not so for the financials with only a Fibonacci 38.2% (closer to 30%) retracement.

After the 2000-2002 bear, the Nasdaq in 2007 only retraced a 38.2% (actually closer to 45% but it ruins the flow). Where was the broad market? At or near new highs and saying "what bear market?"

The bubble markets retraced less than half while the rest got it all back.

Under this scenario - without any true statistical backing - it is time for the financials and the market as a whole to top out again.

Wouldn't it be cool to see the current bubble - bonds - follow the same script? If they do, then there is a lot of pain ahead for the next two years.

No comments: