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Nasdaq (and other Bubbles)

Posted By Barry Ritholtz On March 10, 2005 @ 7:45 am In Markets | Comments Disabled

Today is the 5th Anniversary of the Nasdaq’s peak –  5048.62 on March 10, 2000 on a closing basis (The Nazz actually hit 5132 intraday).

Let’s do a little “compare and contrast” with Nasdaq, and other previous bubbles. Recall we visited this theme in Three Bubbles [1] exactly one year ago (graphic [2]). The goal is to merely consider some  possible scenarios, so as to not get caught in mental boxes of our own making.

click for larger graphic [3]

Now compare these with this chart from Charles Nenner of Cycle Forecaster BCA Research:

click for larger graphic [4]


Good News/Bad News

Assuming the Nasdaq stays in the historical “Mania Channel” of past bubbles — an admittedly big “If” — the pattern suggests that a potential move downwards (late 2005/early 2006) of as much as 25 – 33% is quite possible.

And that’s not even the bad news (we’ll get to that later). The good news is that from those lows, the Nasdaq could potentially double, rising up to nearly 3,000 late in 2007; The bad news (you knew it was coming) is that from those dizzying heights, the down side is horrific: The chart suggests we may visit, if not surpass, the post-bubble lows.

That is, according to the historical composite of previous bubbles. That does not mean this is a sure thing, or even a likely outcome. Rather, it is merely one way of amalgamating prior data into a possible scenario.

I use these sorts of charts to help map out a worst case scenario.In my mind, I want to keep a visual of what could happen, what might occur. These gloom and doom exercises help traders imagine horrific crashes.

Hope for the best, but be prepared (mentally) the worst . . .


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UPDATE March 10, 2005 6:15am
Dave Callaway compares Oil with the Nasdaq Bubble of 2000 (Double bubble oil and trouble [5]); As I said on Squawk last week, and again here on Tuesday [6]:  You’ll know when Oil starts to get “stupid.

We’re almost (but not quite) there. The pundits who all said oil was unsustainable at $40 ($15 terror premium and all that) have been replaced by those calling for $80 crude; I can’t tell you if they are  the same T-heads.

Happy anniversary . . .


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Sources:
Nasdaq and Past Bubbles
Charles Nenner, Cycle Forecaster

Memories of Nasdaq’s High [7]
As Dow Flirts With 11,000, Technology Stocks Also Stir But Far From the Bubble Days
By E.S. BROWNING
THE WALL STREET JOURNAL, March 7, 2005; Page C1

http://online.wsj.com/article/0,,SB110995029690370706,00.html


Article printed from The Big Picture: http://www.ritholtz.com/blog

URL to article: http://www.ritholtz.com/blog/2005/03/nasdaq-and-other-bubbles/

URLs in this post:

[1] Three Bubbles: http://bigpicture.typepad.com/comments/2004/03/3_bubbles.html

[2] graphic: http://bigpicture.typepad.com/comments/3_bubbles.html

[3] Image: http://www.ritholtz.com/blog/wp-content/uploads/2005/03/wsj_infonasbubble0503_3.gif

[4] Image: http://www.ritholtz.com/blog/wp-content/uploads/2005/03/nasdaq_bubbles_1.jpg

[5] Double bubble oil and trouble: http://www.marketwatch.com/news/story.asp?guid={4CB0E0A3-3476-414C-84FA-199D2C203FA0}&siteid=mktw&dist=nbc

[6] Tuesday: http://bigpicture.typepad.com/comments/2005/03/the_psychologys.html

[7] Memories of Nasdaq’s High: http://online.wsj.com/article/0,,SB110995029690370706,00.html

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