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Huge growth patterns in markets — more commonly known as “bubbles” — have a
remarkable timing signature common to every single one of them – they all have lasted 64 or 65 months from initial growth to blow-off top.
The above introductory comments are edited excerpts from an article* by David Nichols (fractalgoldreport.com) as posted on Safehaven.com under the title Special Report: The 64-Month Pattern in Stocks and Gold.
Nichols goes on to say in further edited excerpts:
This includes the 3 biggest bubbles in modern market history:
– the Dow into the 1929 peak:
– the Nikkei into the 1989 peak:
– the Nasdaq 100 into the 2000 peak:
– Crude oil into 2008:
Statistically the chance that these pattern alignments can be explained by random chance is essentially zero.
The correlation gets even more compelling when we zoom in and look at the way these 64/65 month patterns develop, as there are calibration points along the way to let us know whether it is tracking as expected. The most significant characteristic of these bubble patterns is the huge vertical move that starts after a Month 45 low.
You can see this clearly on just about every previous bubble pattern — prices go ballistic during the late stages, from Month 45 to Month 64 or 65 and, sure enough, this is exactly what has happened on the current pattern for the S&P 500.
Is this time different? Is this relentlessly linear drive into the upper right quadrant of the chart the “new normal”? That is the battle cry of every bubble naysayer and Fed defender but market history tells us that the most dangerous words in financial markets are “this time it’s different”.
No matter how you feel about the Fed and the unprecedented flood of central bank supplied liquidity, the simple fact is this thesis can only levitate markets as long as people believe it is having an effect. The Fed cannot prevent money from exiting stocks if the collective psyche of investors switches from complacency to a sudden fear of loss.
This switch in market psyche can happen quickly in a sudden rush of recognition, or it can develop more slowly, infecting groups of individuals at different times. In equities it typically develops slowly, and the early returns on this pattern indicate that this current top is likely to develop as just such a slow-roller.
The time to exit this pattern at Month 65 has already come and gone, in late July 2014. The markets have now entered an unstable period that is designed to make you confused and anxious about your positioning — no matter what it is. Everybody will be under attack.
Right now (September 2014) bullish investors are getting a reprieve with a “tail whip” back to the upside. This is when a market whips back on all those who are too quick to jump on the weakness in an obviously overvalued market — which this one certainly is — so the market clears the decks of positions on both sides before the full correction can occur…
This brings up a philosophical question about when a market pattern actually tops out. I would argue that this topping point is the first high — when the market stops going up, but doesn’t necessarily start going down in earnest. The risk of holding long positions goes up significantly from this initial topping point, in spite of any marginal new highs in subsequent trading.
I think we’re at a similar point now. Avoiding the confusion of this unstable post-bubble high will serve you very well in the long run, as you will be in the correct mind-set to jump on opportunities on the long side after the correction has played out, or even during it, if you can be more nimble.
Month 69
The next important timing point on this growth pattern is Month 69, which arrives in November. Most of the time Month 69 is a very important destination after Month 64/65…and then Month 72, in February 2015. Both of these timing points should be critical, and at this point it looks likely that both will be significant lows.
Editor’s Note: The author’s views and conclusions in the above article are unaltered and no personal comments have been included to maintain the integrity of the original post. Furthermore, the views, conclusions and any recommendations offered in this article are not to be construed as an endorsement of such by the editor.
*http://www.safehaven.com/print/35456/special-report-the-64-month-pattern-in-stocks-and-gold (Copyright © 2008-2014 Fractal Gold Report. All Rights Reserved.)
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