Dotcom Bust 2.0

To figure out the future, you have to study the past.  Things never play out the same way, but there are general tendencies in the financial market.  The main template for the current time period is not the 1970s inflationary period, or the 2007-2009 financial crisis period, but the late 1990s/2000 dotcom bubble.  The 2 main ingredients that you saw only in that bubble and in this bubble was the extreme greed in chasing the riskiest investments (2000: internet stocks.  2021: bitcoin, meme stocks, EV/speculative tech stocks), with widespread popularity in stock investing and daytrading.  You never saw that in the 1970s or in 2007.  The sheer amount of assets that poured into the stock market not only through equity funds but through direct investments by retail, is eerily similar to 1999/2000.  

The extreme bubble valuations in this everything bubble is only rivaled by the peak valuations during the 2000 bubble.  Valuations are not a great timing tool, but they are a great measure of the amount of expected return for playing the long or short side.  The higher the equity valuations, the lower the long term expected returns, and vice versa.  Its all common sense, but the big picture is often forgotten as we focus on short term price movements, earnings, the latest Fed speak, economic data, etc.  

So going by the dotcom bubble template, the Nasdaq topped out in March 2000, and made the final bottom in October 2002.  That is 30 months from top to bottom.  If you look at this Nasdaq bubble, it topped out in November 2021 and if it were to follow the same time frame as the dotcom bubble, the market would make a final bottom in May 2024.  Now I don't think it will take that long to go down to the final bottom, but its a possibility.  It gives you an idea of how long the bear market can last if it just follows the normal post bubble course of action.  My best guess would be a bear market that lasts until late 2023/early 2024, so about 2 years in length.

Let's take a look at the waves up and down in the Nasdaq 2000-2002 bear market.  

Nasdaq Jan. 2000 - Dec. 2002

If I were to guess where we are in the bear market relative to 2000, it would be around November of 2001, after a sharp rally off the 911 lows in September.  That rally and subsequent sideways chop lasted for 4-5 months before it gave way to an absolute bull killer of a downtrend that lasted 6 months from the bear market rally high in January 2002.  

With the dollar dropping sharply in the past week, it looks like the US dollar uptrend is in for a long period of consolidation, which likely means we are in a long period of consolidation for the equity market before the final down wave which is always the most brutal.  I could see that starting in the first quarter of 2023 and lasting till the summer.  This post CPI move should not go much higher, as I don't expect a Mt. Fuji formation of straight up and straight down.  It will likely be more of a Alps mountain range of gradual tops and bottoms for a few months before the bottom falls out and we enter a long downtrend that will eventually lead to a capitulation by the bulls.  We could be trading in a narrow range from 3800-4050 for the next 3 months. 

I expect the bond market to be strong in 2023 as inflation slows down and the recession becomes more clear in the economic data.  That should be supportive for equities initially, but when the economy really starts to slow down in the spring/summer, entering a deep recession (don't believe the shallow recession predictions), you will see bonds and stocks going in opposite directions.  I agree with the long term secular inflation theme due to the populist wave of politicians that love to deficit spend to buy votes.  But the disinflationary forces of a deep recession will make people forget about inflation for the next 12 months. 

Bottom line, there is still a long ways to go for this bear market, and it appears the first phase is done, and before you transition to the next phase, usually you will see a long consolidation of the downtrend to build up potential energy for the final big down move which usually leads to the bulls throwing in the towel in despair.  

Still not short yet, don't have a lot of confidence that we'll get a sharp move lower anytime soon.  At the same time, don't think we'll get a continual squeeze higher, although a minor overshoot above 4000 towards 4050 is definitely possible.  After studying the charts and looking at the 2000-2002 bear market, I will only be shorting NDX and tech stocks.  Expecting continued underperformance for tech stocks for several months.  Am long some Treasuries to play for a sharper economic slowdown than most expect.  Will look to start a small short in NDX and tech into any strength this week.