On Tuesday, the Nasdaq posted its highest close since the year 2000. It's exciting to experience this index achieving a 10-year high.
I love technology. It's hard to imagine life now without computers, software and hardware. It's great to see old school Nasdaq names making a comeback, with Microsoft (MSFT), Oracle (ORCL), Cisco (CSCO), Intel (INTC) and even the recently unpopular shares of Apple (AAPL) rising.
Major shareholders in these companies have good reason to be cracking out champagne along with the artist formerly known as Prince, to party like it's 1999. Good times are back, but will things end any differently this time around?
While I'd love to see the Nasdaq and stock markets in general continue to climb higher indefinitely, history suggests that this outcome is unlikely. In fact, this 20-year chart of the S&P 500 index suggests that the current party may be nearing its end.
What patterns do you notice in this chart? Where would you expect prices to head next? What's really interesting to notice above is the pattern of higher highs and lower lows. If this pattern continues another cycle, which I believe is likely, we will experience a lower low within the next two years. This would represent a drop of at least 60% for the S&P 500 index.
I know, I know you might be thinking--this article is about the Nasdaq, not the S&P 500. And why is this nutty contrarian harshing my buzz? Who invited him to the party? He's such a downer.
Well, let's address the first point. Below is the same chart as above, but with the Nasdaq index drawn in red. You'll notice the strong correlation and exaggerated upside moves.
Unlike the S&P 500, the Nasdaq set a higher low in 2009 than it did in 2002. If this pattern holds, this index may only lose 55% of its value. This would be similar to its last major drop, but far less than its bubble-bursting plunge in 2000-2002.
I consider myself an optimistic guy, especially about the incredibly oversold gold mining sector right now. I hate to be a party pooper, but I'd rather warn readers ahead of time than see them lose a large portion of their hard-earned savings again. I warned investors in late 2007 through this YouTube video and hope that even more people avoid devastating losses this time around.
It may be premature to sell short tech stocks or Nasdaq index fund like (QQQ). And I'd never suggest buying Nasdaq bear funds like (PSQ) or (QID) because they suffer from ongoing price erosion (aka beta slippage). News like we had on Tuesday, tends to generate a lot of attention and interest from shortsighted speculators and misguided retail investors.
Returning to the theme of this article, in case you're curious, in 1999 the Nasdaq jumped from 2,200 to over 4,000. With Tuesday's close at 3,504, it probably is appropriate to do what this little man says. Just know that no party lasts forever and the downside risks at the moment appear to far outweigh the upside potential. Partying with cash in one's account rather than Nasdaq stocks, will probably make for a happier ending.
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