NASDAQ Mania

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    This study was commissioned by Blake Hartill, CFA, of Gold Stock Research, a division of Downstate Securities Group, Inc., 259 Indian Rocks Road North, Belleair Bluffs, FL  33770, 1-727-518-9101, fax: 1-727-559-8889. 

    We are grateful to Mr. Hartill for suggesting the idea and for giving Topline permission to publish this study. The entire study, including high resolution charts (through 3/10/2000, is available for download in Adobe Acrobat (PDF) format. 

Note: This study was written using data through the close on Friday, March 10th, 2000, and it was sent to Mr. Hartill's clients the following week.
It also was featured in the April 12th issue of Richard Russell's Dow Theory Letters.

Click for charts updated through April 4th, 2000


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The Crowd Goes Wild!

NASDAQ: Example of a Mania

There have been many financial manias in the past, including Holland’s tulip mania, the 1929 stock market boom in the US and the precious metals mania that ended in 1980. The three charts attached have a simple message: The explosion in the NASDAQ Composite index is one of the greatest financial manias in history.

1)     The growth rate of the NASDAQ has become extreme.

Trendline on the second chart is growing at 86% per year. There is no historical precedent for any stock market index sustaining a growth rate of 86% per year for a prolonged period (unless it's measured in a currency whose value is collapsing, e.g., paper Marks from 1917-23). Trendline is growing at 279% annually.

From January 28th to March 10th, the NASDAQ rose 29.9%. For comparison, in the six weeks before the 1929 peak, the DJIA only grew 10.9%. In the twenty-one weeks before March 10th, the NASDAQ rose 87.8%. In the entire history of the DJIA going back to 1885, the only time the twenty-one week percent change was that high was in 1933, rebounding off the 1932 lows.

This is truly extreme growth. It is scary how much of the public considers the growth in the NASDAQ since October 1999 as normal, or a little better than normal for a bull market.

2)     The NASDAQ could drop substantially without even breaking most of these trendlines.

The NASDAQ is way above five of these trendlines, and is even still above trendline .

                 i.          Today's close of 4,706.63 is over 36% above trendline , (that is growing at 86% per year).

               ii.          Today's close is over 139% above trendline , (that is growing at 21% per year).

             iii.          Today's close is over 242% above trendline ¸ (that connects the 1975 and 1994 lows, and is growing at 12.7% per year).

              iv.          Today’s close is 207% above the LSF* trendline 1, which best fits the NASDAQ from 1974-94.

               v.          Today's close is over 135% above trendline ·, the upper parallel channel to the LSF trendline.

 

Even someone who clings to the mega-bullish premise that the NASDAQ will continue to grow at 86% per year, would have to admit that a decline back to trendline º would not violate his hypothesis (of 86% growth per year). That’s a 26% decline from today’s close, and a decline of over 31% from Friday’s peak at 5,048.62. Many analysts define bear markets in stocks as declines of 23.1% or more, (those declines which require an advance of at least 30% to be retraced). A pullback to trendline º would qualify as a bear market. Declines to the other trendlines would dwarf that pullback.



* A Least Squares Fit trendline is also called a "regression line". It is the straight line which best fits the data (in this case the NASDAQ daily close from 10/3/74 through 12/9/94). "Best fits the data" means that the sum of the squares of the vertical distances from the data points to the line is less for this line than for any other straight line.


While all of these charts are available in the free PDF download, you can click any of them to open a new window with a larger version of the chart.

 

 


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Last modified: April 06, 2005