Over-extensions in the stock market are easy to see using the 25 year chart with monthly bars and the 200 month moving average. The chart below has the March 2000 and October 2007 bubble peaks plotted as to how many points they had moved away from their 200 month moving average before they were pulled back fiercely.
click on image to enlarge
S&P 500
- Looking at the left chart of the S&P 500, we see the peak of the internet bubble was extended 1,051 points from its 200 month moving average on that date.
- The peak of the 2007 housing bubble was a not so absurd 634 points from its 200 month moving average on that date.
- This week the S&P has become extended 1,253 points above its 200 month moving average which is a roughly 20% greater over-extension than the peak of the internet bubble where the average stock lost 80% of its value in the two years that followed.
NASDAQ
- Looking at the right chart of the NASDAQ, we see the peak of the internet bubble was extended 4,279 points from its 200 month moving average on that date.
- The peak of the 2007 housing bubble was 1,206 points from its 200 month moving average on that date.
- This week the NASDAQ has become extended 4,031 points above its 200 month moving average which is just a few percentage points from matching the NASDAQ's internet bubble peak which has been considered the most absurd financial event in history where the average stock lost 80% of its value in the two years that followed.
Many talking heads in the media are saying we are not in a bubble, that things are different this time. Perhaps it is best for investors to judge for themselves.
Trade well my friends
Alan
