Straight-up moves in the financial markets are fun while they last. But they’re miserable when they come to an end.
And they always end – usually by erasing 100% of the gains in a symmetrical straight-down move.
Let’s use the biggest bubble of our lifetimes as an example. Here’s a chart of the NASDAQ right before and after the dot-com bubble in 2000…
The NASDAQ started its parabolic move in June 1999. The rally lasted nine months, and by the time the index peaked in March 2000, the NASDAQ had doubled in value.
The index had gone vertical. It was panic buying. Get in or get left behind.
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Those sorts of moves are exhaustive. They’re unsustainable.
Nine months later, the NASDAQ was all the way back down to where it was trading in June 1999.
The charts of silver and gold showed similar patterns when they peaked back in 2011. Here’s how silver looked back then…
Silver’s parabolic rally started off quiet enough in November 2010. Four months later the metal went vertical. By early May 2011, silver had gained 100% in about six months.
But that action exhausted the buyers. The price of silver dropped as rapidly as it had risen. It took seven months to erase all of the gains of the previous rally.
Gold showed the same action in mid-2011…
Gold’s parabolic move lasted four months. The final vertical move took gold all the way up to $1,900 per ounce in August, 2011 – up more than 20% in just over one month.
The decline was just as fast.
Now, the argument most folks make after I show them these charts goes something like, “Yeah, but all that stuff happened years ago. Investors are smarter than that today. They’ve seen it before. They won’t make the same mistakes.”
If you’re inclined to think that way, well, there’s just one word… Bitcoin.
Bitcoin went vertical last December when it rallied from $10,000 per coin to $20,000 in about three weeks. It also took just about three weeks to give all those gains back. Bitcoin traded below $10,000 per coin last week.
My point is this… vertical moves in asset prices are unsustainable. They’re dangerous. And they tend to be erased just as quickly as they occurred.
With that in mind, here’s a current chart of the S&P 500…
The S&P 500 has gone vertical. While we can’t possibly know exactly when the rally will end, the slope of the parabola suggests we’re approaching the exhaustion phase.
Also, key technical indicators, like the MACD<https://click.exct.jeffclarktrader.com/?qs=eb7c5ef62c6915c6921b425ed0b2cea6b11ad0d14fdfdaad27df57bd121875eafa046d74d7fc935473610a422f6244a271ed11f482046bef> momentum indicator, closed Friday at the most overbought levels in the 35 years I’ve been involved with the financial markets. Maybe they’re the most overbought levels ever.
This is a dangerous environment in which to put new money to work. We can’t know for sure. But it seems to me traders should get a shot at investing at lower prices sometime within the next three months.