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Zedpher
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Director of Research & Owner at Ivancic Associates. Creator of the IMTS which uses multiple variables and signals to create a heatmap of market health and momentum.
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Ivancic & Associates Market Analysis and Reports
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  • Stock Market Bubbles - Past & Present 0 comments
    Dec 5, 2013 9:47 AM

    There has been a lot of talk recently about stock market bubbles. Seems that we've been hearing about bubbles all the way back to around 2005 when people began to voice concerns about the housing market in the U.S.

    Using the Ivancic Market Trend System (you can see how it works here), we are able to gauge market sentiment and see whether an index is in bubble territory. For us, bubble territory means the hottest a market can run and is unsustainable over a very long period of time without collapsing.

    I want to take you on a visual tour of various indices and the times that they were in bubbly territory according to the IMTS. The system shows the temperature of the market when the second numbered/colored column from the left (next to the prices). Each shade of color shows the temperature of the bull market:

    rusty red -> level 1, warm

    bright red -> level 2, warmer

    gold -> level 3, hot

    bright yellow -> level 4, bubble

    Dow Jones Industrial Index

    The DJIA is currently not in bubble territory, not even close actually. It is currently at a similar level as it was back in 2007, based on the prices of last week. Ominous, I know, but that does not mean it is going to crash anytime soon. You can see the peaks of the seven times that the DJIA has been in bubble territory since 1898.

    2013

    1997

    1987

    1955

    1936

    1929

    1906

    1899

    As you can see, each time the Dow Jones was in bubble territory, the Extreme Indicator (yellow column in the middle of each table) ranges from 0.126 to 0.173. For the DJIA over the past 115 years, this has been the upper limit of its frothiness. The white column next to it, is also at a bubble peak for the Dow. Each time the index got into a bubble phase, this reading went up to the 0.07 to 0.08 range.

    The 1929 bubble ran the hottest of all, with a reading of 0.173. Whenever the Dow gets in this range, we know that we are getting close to a peak.

    S&P 500

    2013

    1998

    1987

    1955

    Since 1952, the S&P 500 has only been in bubble territory three times. Much like the DJIA, the S&P peaks with its Extreme Indicator between 0.138 to 0.151 and each time, the other Sentiment Indicator has peaked at exactly 0.07. Currently the S&P is not in bubble territory, but it is at the beginning of the range right below it.

    A very interesting observation is that at its current level, the S&P 500 has only entered this range (since 1952) at the beginning of secular bull markets. Here are the only other years when the S&P has been at its current level:

    2013, ?

    2000, 1995

    1986, 1983, 1980

    1959, 1956, 1954, 1952

    What do these years all have in common? They were all right smack at the beginning, middle, and end years of strong bull markets. And today, in 2013, the S&P seems to have begun a new bull market entry in the ledger.

    NASDAQ

    2013

    2000

    1992

    1986

    As you can see, the NASDAQ entered bubble territory last week. Since it is at a very early stage, it is nowhere near the fearsome temperature that it registered during the Dot Com era, when the index was as frothy as an equity/commodity (which is rare for a North American index) or an emerging market index. Back then in the 1990s the NASDAQ boiled hotter than it ever did during the Roaring 20s and the terrible secular bear market that followed and that we are at the end of now was a direct result of the decades of credit expansion and market speculation that began in the early 1980s.

    Another interesting observation is that the NASDAQ has always begun its bubble-action before the other indices (1986, 1992, 2013) so it can be viewed as a leading indicator for its brother and sister indices.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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