A Mania to Rule Them All [Note: This material is for educational and entertainment purposes only]
STOCK MARKET CHARTS tell a story. Of course on the surface, most chart styles show a continuous map of prices over a period of time. But what a chart actually depicts is a series of collective (investor) responses to the flow of new information about the earnings potential for the companies involved (e.g. DOW or S&P 500). OK, so what? Well during the evolution of a mania or bubble, there comes a point when prices are driven not by the potential for earnings but by the price action itself. In other words, more emphasis is placed on the rising prices than on the reasoning behind them. Perhaps my favorite definition of a bubble is purely psychological – as it should be: a bubble happens when people are more fearful of missing out on continued gains than they are about losing a substantial portion of their investment.
a bubble happens when people are more fearful of missing out on continued gains than they are about losing a substantial portion of their investment
The reason for this is that they don’t perceive much risk in the first place. That’s usually because there’s a story or a myth that is shared by the herd. For example, the myth today might be that “The Fed won’t let the market go down.” Or that “After we get a vaccine, the market will go crazy because . . .. “(you can pick any inane explanation to finish the sentence). The chart below (from bigcharts.com yesterday) shows the weekly prices of the QQQ–an enormous ETF that tracks the NDX, an index of the largest technology stocks–since about 1999. The tech bubble peak and crash are at the left. The 2009 lows are at 30. The QQQ is at 275 or so right now. That’s right; it has almost gone up ten times its value in eleven years. What is actually more absurd is that it has more than doubled in the last five months amid an economy that flatlined and had to be defibbed by the FED and the stimulus, i.e. “CLEAR.”
It is important to emphasize the third sentence of this post.
“. . .what a chart actually depicts is a series of collective (investor) responses to the flow of new information. . .”
In the chart above, the red line that traces the prices is an acceleration curve. What this means is that investors profit expectations are increasing at an increasing rate (which soon makes them impossible). Now it’s time to emphasize the first sentence of this post.
“Stock market charts tell a story.”
The story of this chart is about a 30-year history that featured the Digital Revolution, falling corporate tax rates, and a muscle-bound monetary policy by the Federal Reserve that mainlined cheap money to firms–all of which led to a culture of debt and of obscene profit plowbacks (trillions in share buybacks). Add to those conditions the facts of little or no anti-monopoly or consumer-privacy regulation and you have the current state of mind that the biggest technology players are indomitable.
But you didn’t even need to hear about the story or the conditions because all manias (aka ‘bubbles’) have the same chart pattern–an acceleration curve like the one above. This one, however, instead of taking years to form, took decades to form. This is the Madre of them all. The broader market has many of the same frothy characteristics for many of the same reasons.
As I mentioned in my post, Twilight in the Land of More (https://www.moviesmarketsandmore.com/twilight-in-the-land-of-more/ ), the COVID-19 pandemic is a catalyst; it is already changing things and the biggest changes are probably yet to come.