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U.S. Stock Market Enters Parabolic Price Move – Be Prepared, Part I

By Chris VermeulenStock MarketsJun 23, 2020 05:07PM ET
www.investing.com/analysis/us-stock-market-enters-parabolic-price-move--be-prepared-part-i-200528621
U.S. Stock Market Enters Parabolic Price Move – Be Prepared, Part I
By Chris Vermeulen   |  Jun 23, 2020 05:07PM ET
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After the recent COVID-19 virus event and the global market concerns that will warrant caution for skilled traders and investors, the U.S. stock markets have entered an upside parabolic trend that will likely end with a massive price collapse – extremely volatile and aggressive in nature. Our research team continues to warn of the unpredictable nature of the current price rally and the fact that the upside parabolic price trend appears more prominent in the NASDAQ sector. If history has taught us anything, it is that these types of parabolic moves can last a while and that they always end in a deep downside price correction – usually 61% to 75% of the last upside price trend.

Our research and trading team has been advising friends and followers to stay very cautious of the current markets (excluding gold, miners and certain other protective sectors). We don’t believe this rally warrants any exposure greater than 15 to 20% given the current global economic environment and the hyper-parabolic nature of the current price move. We believe the opportunity presented by the upside advances does not negate the potential risks of a massive collapse event taking place in the near future. In other words, we’re more cautious of how ugly and aggressive the end of this parabolic move will be than willing to try to find some opportunities in an already hyper-extended parabolic upside price trend.

Still, there are opportunities to be had in this trend for skilled short-term technical traders. A number of sectors continue to perform quite well, and using proper position sizing for trades may allow for quick targets of 5% to 10% or more. We urge all of our friends and followers to be cautious of the current rally in the markets as we’ve only seen this happen three other times over the past 100 years: 1927~29, 1986~87, 1996~99. The collapse after the 1929 peak resulted in a 90% decline in prices. After 1987, the markets collapsed by nearly 36%. After the dot-com market peak in 1999, the markets collapsed near 51%.

Are the markets preparing for a massive collapse event right now with this hyper-parabolic upside price trend?

NASDAQ Monthly Charts

This monthly E-mini NASDAQ Composite Futures chart highlights the upside parabolic price move that is currently taking place. It also highlights the similar type of price movement that took place in the late 1990s. In theory, the buying power driving the markets higher can last more than 12 to 15 months in some cases.

Prior to the peak in 1929, the parabolic move started near June 1926 and peaked in July 1929 – approximately three years. In 1986, the rally in price was shorter – only lasting from November 1985 to August 1987 – about 21 months. The rally to the Dot-Com peak in 1999 started near March 1995 and lasted a total of approximately 51 months (just over 5 years).
The current rally, as we identify the start of the parabolic price trend, started after the 2015~16 sideways price range. Our research team considers the start of this current upside move as initiating near July 2016 and continuing through to today – totalling almost four years in length. If we discount the 2015~16 sideways price channel and consider the 2012 to 2020 Fed-induced price rally as
the “total scope” of the parabolic range, then we can easily total more than seven years into this incredible parabolic price move. This move is truly unlike anything we’ve seen in the recent history of the U.S. stock market – and the crazy component to all of this is it is happening at a time when the global markets have just been derailed by a global virus pandemic.

What comes next?

Well, if history is any teacher – a peak in price sets up, volatility starts to explode and a collapse in price initiates at some point in the future that completely deflates the bubble.

The most prominent example of a price bubble that many traders are familiar with is the story of the South Sea Company (1719 to 1721). Prior to the peak in this bubble story, the South Sea Company began as an act of English Parliament (source: https://engl3164.wordpress.com/2012/10/31/the-south-sea-bubble/ ).

As stated from our source:

At this time, the English government was deeply in debt. Harley, the Earl of Oxford, came up with a scheme to free England of this debt while capitalizing on what was perceived as a largely untapped gold and silver market in South America. Harley proposed that Parliament could create an independent company that would assume all of England’s debt and, in exchange, would be able to charge the government yearly interest until the original sum was repaid. The company would be able to afford to assume this debt because England would grant it a monopoly on trade from South America. The company would prosper, English influence would be extended further into the New World, and the English government would become free of debt. This plan was so popular that it was called “the earl of Oxford’s masterpiece” (Carswell, 1969).


It took several years to form the company and work out the details of the agreement. By 1720, the South Seas Company was formed and received £30,981,712 in debt from the English government in exchange for a promise that the English government would pay £600,000 per year interest. However, the plan had already begun to show major weaknesses, even before taking on this huge debt. The success of the plan rested on the assumption that a monopoly on English trade with Latin America was worth almost limitless profit. Certainly, Spain was enjoying great profit in extracting gold and silver from this area. Yet a major problem was that Spain owned the rights to South American trade and would allow England only one ship’s worth of trade per year for the entire continent and only on the condition England pay 25% of the profits to Spain in addition to a 5% tax. Even this small concession ceased entirely in 1718 when England declared war on Spain (Carswell, 1969).

We want all of our readers to understand the psychological aspect of this past bubble – the idea that the plan could not fail and would provide almost limitless success if executed as planned set off a “no fear rally” that eventually resulted in a massive price bubble.

The next major point that is critical to the understanding of how a price bubble functions is the following statement from the same source:

Regardless of the fact that the South Seas company was an unproven company already sunk deeply in debt, with no realistic prospects of profit, it was perceived as an almost infallible opportunity. As with all economic bubbles, the public’s perception of its potential was far greater than its actual value. For this reason, stock prices soared. Modern economists have argued that some investors may have been fully aware that this was an artificial market that was bound to fail. However, realizing that stock prices would continue to climb until the bubble burst, it would still have been profitable to buy stock with the intention of selling before prices inevitably plummeted (Temmin and Voth, 2003).

What could go wrong with this plan for investors? It seemed as if nothing could fail – there was almost no risk and everyone had incredibly high expectations of future success and profits. Then, more good news for traders and investors. More shell companies promising future greatness to continue to hype the markets.

Unfortunately, investors in the South Seas Company were not the only individuals to lose money during this time. Many businessmen, realizing the potential for profit in such an artificial market, began similar schemes to create companies with inflated stock prices. Hundreds of companies were formed within only a few months, with thousands of individuals rushing to buy stock. Ultimately, these companies went the way of the South Sea Company. Countless investors lost fortunes while many dishonest market speculators became rich (Carswell, 1969).

Eventually, when reality set back into the minds of these investors, many had lost entire fortunes, families and futures. Some of these company founders were hunted down and killed because of the anger and frustration of many investors and others. The reality of the situation is that nothing is without risk – just like the stock market valuations today.

In the second part of this research article, we’ll continue to explore the potential price bubble that is setting up in the U.S. and global stock markets as a result of the U.S. Fed and global central banks pushing speculative investments into the global equities markets (primarily the U.S. stock market). It is essential that all skilled traders and investors learn to understand what is happening and to understand the severe risks that are currently in play in the markets right now. Stay cautious, stay protected and stay safe.

U.S. Stock Market Enters Parabolic Price Move – Be Prepared, Part I
 

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U.S. Stock Market Enters Parabolic Price Move – Be Prepared, Part I

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Comments (26)
Eric Nyland
Eric Nyland Jun 23, 2020 11:57PM ET
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Thanks for using the Newton example - everyone thinks they're smarter than the market right now. Newton was probably one of about 20 people in history who actually had a chance at being smarter than the market, but in the end so much for that, as your example shows. Arrogance and FOMO are a bad mix. There is so much nonsense hype flying around right now, it is hard to keep one's head straight: you are helping me remember that it's not worth jumping in. Please keep writing.
spirit trader
spirit trader Jun 23, 2020 11:48PM ET
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As per Elliot Wave Principle, the NASDAQ is completing a 5-wave uptrend pattern that should then correct downward by 38-62%. This could happen soon as there is a negative divergence between price movement and the RSI on both the daily and weekly charts.
Eric Nyland
Eric Nyland Jun 23, 2020 11:38PM ET
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Thank you for this. I don't know if you're right, but it's a nice antidote to the expectations everywhere that the last drop was just some kind of mistake that can be overlooked, or that because the market is forward thinking that we can ignore that the economy turned off for a couple of months earlier this year. It is hard to fight the FOMO right now, and one begins to feel crazy and stupid for questioning the idea that profit-free, or barely profitable, moat-free tech stocks with massive p/e ratios represent "safe havens" on the tail end of one of the worst economic disasters in history.  At a minimum, I always learn something new reading your stuff. Please keep it coming.
Devendra Barhanpurkar
Devendra Barhanpurkar Jun 23, 2020 11:08PM ET
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Thanks Chris always giving details about current situation & what investors need to do.
Jime Jones
Jime Jones Jun 23, 2020 10:57PM ET
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807 articles from this guy...806 of them wrong. Try to find the right one.
Chris Poulos
Chris Poulos Jun 23, 2020 10:33PM ET
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the 20 year nasdaq chart could not be more obvious ...  a sharp pullback to the previous double top of 5000 is inevitable.
Bhaskar Mahyavanshi
Trader2020 Jun 23, 2020 10:26PM ET
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I don't know if this is true or not.  No matter what the situation will be, never rely on one article or one analyst to make your trading decisions.  Always counter check with other reliable analyst.
Chris Poulos
Chris Poulos Jun 23, 2020 10:24PM ET
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just look at some of the 10 and 20 year charts. look how high the valuations are. we may be in an atypical recession that may or may not result in a severe or mild downturn but the entire global economy is going to experience some bumps. pay attention and be careful ... a big collapse (or a small one) is a very likely scenario in the next few months.
Wrongway Whiplash
Wrongway Whiplash Jun 23, 2020 9:30PM ET
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Blood, Sweat & Tears ...
Shahid Ahmed
Shahid Ahmed Jun 23, 2020 8:42PM ET
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Nothing but waste of time to read all rubbish.
Esteban Márquez
Esteban Márquez Jun 23, 2020 8:10PM ET
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With all respect, this article has a market manipulation objective.Is the Nasdaq the US stock market? Why don't we look at Russell 2000 graph? The NQ just made clear that investors believe in the future and technology while positioning there whatever doesn't match. They turned themselves into safe havens.
Esteban Márquez
Esteban Márquez Jun 23, 2020 8:10PM ET
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By the way, i was about to sell because of this (after market 7:50pm), but i found my trading wisdom let me know what this was. We ll find out tomorrow.
Eric Nyland
Eric Nyland Jun 23, 2020 8:10PM ET
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With all respect - it's an opinion piece, so yes, it is generally expected that these kinds of articles aim to manipulate opinions. That said, it might in the final analysis be a little less manipulative than the several trillion dollar fed injection that spurred this rally.
spirit trader
spirit trader Jun 23, 2020 8:10PM ET
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Tech stocks are driving the U.S. market right now, so in a certain sense the NASDAQ '"is" the U.S. stock market. When the giant tech stocks have a correction, they will bring all indexes down with them.
Randall Wagner
Randall Wagner Jun 23, 2020 8:06PM ET
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How many months have you been saying this is eminent. You surface ever so often with this. 3 months nothing...the opposite. My I say that at sometime the market may go down and at some future time it will go up.
Chris Poulos
Chris Poulos Jun 23, 2020 8:06PM ET
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jesus was eminent ... the stock collapse could be imminent  ... if you read carefully the author of the article does not say this will happen tomorrow. anyone should be able to see that we are in an unsustainable bubble .... please be careful out there!!
Randall Wagner
Randall Wagner Jun 23, 2020 7:55PM ET
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You must really hate the country. and Trump.
shaheda maroof
shaheda maroof Jun 23, 2020 7:55PM ET
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What trump has to do with it, he made fortunes by going bankrupt 15 times and not paying his debters and suppliers. Sure he has lots of tricks in his sleeves!
Jeremy Thornton
Jeremy Thornton Jun 23, 2020 7:55PM ET
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I love this country and hate Trump.
spirit trader
spirit trader Jun 23, 2020 7:55PM ET
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Human nature (human psychology) makes the markets go up and down. It has nothing to do with love of country or Trump.
Joey DAngelo
Joey DAngelo Jun 23, 2020 7:27PM ET
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FED gives you money. Do you buy a Honda Civic for $150 000? No, that doesn't make sense. Well that's what you're doing when you buy many equities now, including FANG. The euphoria has clouded rational thinking.
The Poors are at it Again
Nitwit Jun 23, 2020 7:13PM ET
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Well, judging by the expert comments here, I can see most of you are going to lose everything you've made on this run up and then some. The Fed has destroyed the dollar and there's no going back. US markets will get crushed and the dollar will cease to be the reserve currency. Only rookies think a recession can be canceled because of central bank action. Watch and learn, kiddos...oh, and look out below.
Jime Jones
Jime Jones Jun 23, 2020 7:13PM ET
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Sounds like someone missed the rally
Vv Pp
Vv Pp Jun 23, 2020 7:10PM ET
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Thank you. Exceptional analysis, everyone should read this.
munnu jay
munnu jay Jun 23, 2020 7:00PM ET
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the key difference is FANG stocks are not drowning in debt themselves. They have actually found efficient ways to avoid debt and taxes at the same time
Ivo Ivanov
Ivo Ivanov Jun 23, 2020 7:00PM ET
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That's right, but...u forgot something. These companies make money from real business and from real people. If there is no left enough real business and real people with real money to spend for fang stocks…. everything will come in place. U can’t isolate fang companies from the street market. U are right they have cash… but everybody has to know how fast this cash can be disappeared. There is more…if something bad going to happen with the stock market …everybody will need money…and this money will come from sales from fang stock a lot. So…if everything going wrong…there is no plays to hide. I think the best idea is to stay in cash right now…if u can. And wait…months or year…don’t be afraid to miss….u will be the gay to buy when everybody sells. And will Bild portfolio with best prices….for long term. That’s my two cents.
Ha Has
Ha Has Jun 23, 2020 6:40PM ET
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It's impossible to have such a huge correction or a bear market with the current FED support and zero interest. The worst I can predict is a day 10% over a couple of days like what happened earlier this month. And it will be reversed in a few days like always. Wall St investors are smart: they don't fight the fed and they buy the dip. People like you are fighting the fed and will lose out.
The Poors are at it Again
Nitwit Jun 23, 2020 6:40PM ET
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Yeah, you have absolutely no idea what was just said. You're gonna get creamed.
Ivo Ivanov
Ivo Ivanov Jun 23, 2020 6:40PM ET
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U my friend forget inflation.  I understand…u forget what that means in the street market…and u think that inflation in the stock market is actually growing. But with this money around…and this huge debit…. the prices will go up exactly when u don’t expect this.  And don’t forget ….the debit is nice…but big debit will burn u soon or letter. Now we live years with free money and can go deep in debit …but finally, somebody has to pay for a diner. And this will be like usual ….normal people.
Michael Galassini
RoyHobbs Jun 23, 2020 6:24PM ET
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Repeating parabolic and hyper parabolic over and over again does not constitute research......you might need a new team. Going back to 1720 to find a corollary to this market just seems more than a bit flimsy considering it was nearly impossible to conduct any real research on the South Seas Company at the time.
Jin News
Jin News Jun 23, 2020 5:44PM ET
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South China Sea company??? That's way to far back...
Dick Jones
Dick Jones Jun 23, 2020 5:39PM ET
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I agree an asset bubble is forming, but to compare this market to another in another time will only have some similarities not all.  this market is influenced by covid, presidential elections, over valuation , QE,  global supply chain disruption,  fed buying corporate bonds, to use an analogy to another market at another time without all of the exact variables one cannot predicate the future. One key to the short term future of the market is the number of businesses that may go under(since it is easier to support a business than start one from scratch) .  October/November  should have high volatility due to possible resurgence of covid , presidential election and fed ability to support economy would be much less than now.
Narjes Karimi
Narjes Karimi Jun 23, 2020 5:32PM ET
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hiSaying it a million times over a a few months wont make it fact! This is not a normal recession it wqs an economy flipped off and on like a light switch. No more shut downs means no more creashes. Good luck waiting until heII freezes over for your predictions to become reality.
Christopher Knutson
Christopher Knutson Jun 23, 2020 5:25PM ET
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What about the tech revolutions we are in? Autonomous cars mapping oitnrhr human genome after 20 years in the making the 92 million millenials in the usa and 2 billion worldwide that dont wear rolex watches but iphone watches and want to drive autonoumous cars. The massive trillion dollar market of the internet of things and soon the huge amount of jobs to be created from 5g. How about the internet of things that is 7x larger then then inventions of the internet and 1000x bigger then the industrial revolution. Bull markets climb a wall of worry with the technolgy revolutions we are in your missing the big picture and trying to time markets.
Matthew Mover
Matthew Mover Jun 23, 2020 5:15PM ET
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Saying it a million times over a a few months wont make it fact! This is not a normal recession it wqs an economy flipped off and on like a light switch. No more shut downs means no more creashes. Good luck waiting until heII freezes over for your predictions to become reality.
Bev Moer
Bev Moer Jun 23, 2020 5:13PM ET
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One thing missing from the equation - the Federal Reserve Put. The Fed has basically admitted that they will not allow another collapse in the short term. They have been selling vol for quite some time now. They are adding outright ETF buying now as well. Couple that with the inevitable "snapback" after the engineered Covid recession has built a "firebreak" into the markets, and we could be seeing the market hurrying to get back on its pre-Covid trajectory?
 
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