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Comparing Bubbles: Will History Repeat Itself?


Decoding patterns in homebuilders, oil and more.

You what they say: The more things change, the more they stay the same.

I like to point out "bubble comparison charts" a lot because, in my opinion, they show that human beings are an emotional bunch. I like to call the parabolic moves upwards in stocks and indices, "1-800-GET-ME-IN."

Whether it's tulip bulbs in the 1700's or the NASDAQ in the late 1990's, the ugly emotion of greed sets in once a really big move in the price of a security gets going. This always strikes me as odd because when I think about people buying truly important assets like a car or a house, they are always looking for a "deal," but when it comes to the market, for many there is just something about missing out on the big move.

Below I've updated a few of my bubble comparison charts from the past to drive home the point that, in my opinion, greed, followed by fear, is alive and well on Wall Street and, in fact, most corners of the world.

Bubble Comparison 1-Japan/NASDAQ/Homebuilders/China

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Bubble Comparison 2-NASDAQ/Potash (POT)

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Bubble Comparison 3-NASDAQ/Homebuilders/Inflation Adjusted Oil

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Of Coils and Crashes

In my opinion, the market's been consolidating, or "coiling," for the past month or so. Usually, the longer the consolidation, particularly when it occurs underneath resistance, the more "energy" is stored up in the coil. So I decided to go back and take a look at previous periods of consolidation that lasted this long and what the aftermath was. The examples I found were 1987 and 2001, neither of which had a particularly happy ending. See the charts below. Please note that I am not 'calling' for a crash, just pointing out some obvious similarities.

Coil #1-1987

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Coil #2-2001

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As Mark Twain said, "History does not repeat itself, but it does rhyme." The coil/consolidation is built. We just have to wait and see if we get the similar flush.

The credit markets and fundamentals argue for it, but predicting crashes is a tough business. But I will say this. Risks are high: in my opinion, very high.
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No positions in stocks mentioned.

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