Anatomy of a Ghost - Comparing 2008 to Today
Hi all,
Over the course of the last several months, there have been mentions of a possible recession on the horizon. Though some believe the opposite, that we're one major rally from regaining all-time-highs, I believe this is far from reality. If we are to discuss the potential of a stock market crash, it would be helpful to dissect the last recession crash that we had. And - oh, would you look at that. The Ghost of 2008 is floating by! Let's take a look at it and identify some key differences and similarities to today's market.
Bull Market End
We open with a very unassuming uptrend. Things seem fine, but there is a slight kick in the engine. That kick was actually the engine shutting off. The market breaks below its current upward trend for a moment. But this won't deter us quite yet.
Long Shoulder
The market reconsolidates for a moment and gathers up the momentum for one final push. It ends at a new high, and reconsolidates again.
Head
The market tries the same schtick- and it works, reaching all time highs and forming the head of the recession. Keen investors that recognize the first two signals in the market, the trend breakout and retest of the highs, will wait for this second push and sell closer to the top. Smart money exits.
Short Shoulder
Late money recognizes that they missed the mark with the all-time highs, so one last big push is created. Of course, this push isn't enough to send the market to new highs. However, it gives late money a chance to exit. Because these investors don't want to wait, this shoulder ends up being a little more brief.
Channel Bottom (x2)
Now that we've established the top of our bear market, we must establish the bottom. The market will test the bottoms of the channel to see where the edge is, and then confirm it.
Denial Pump
This bear market pump is investors having their midlife crisis. "No, no!" They say, "The party is still kickin', look at us! We're going back to the moon, baby!"
Unfortunately for our permabull friends, the market can only touch the top of the downtrend channel .
3rd Bottom
The denial phase wears off, and we're given a third confirmation of the channel bottom. Even dumb money knows that something isn't right.
Return to Channel Median
A bit of a dead cat bounce, this half-way attempt to reach even the top of the bearish channel will confirm the overwhelming momentum in the market. We may "hover" in this area for a little while before the knees buckle , but then we go straight down.
Breakout Bottom
Unable to retest the channel highs, we're sent back to the channel bottom. This isn't a nice sign for even the most bullish investors, and so they pull out. Seemingly overnight, the market begins to drop like crazy. We break out of the bottom of the downtrend channel and plummet.
Recovery Attempts & False Bottoms
Some believe them to be more clever than the market. These bottom-fishers will catch the falling knife and begin to pump things back up almost immediately. These attempted rallies into normalcy will fail, sometimes many times over during the crash. The market will continue to bounce lower over the next several weeks.
The Final Low
After some time, the market will blow past a seemingly nice recovery and reach a Final Low. When it seems like the crash is happening for a second time, or that "part 2 is coming", that's when it's time to long. The hysteria and panic in this phase will be a sure indicator that either the world ends because the charts look sad or that the rebound is on its way.
Recovery
Finally, we face a market recovery. The rebound brings us higher, and the market enters its new bullish cycle. But this bull run, be it 5 or 10 years from now, will also eventually squeeze
Looking at this past recession and looking at our current market, it does seem that there are some striking similarities in their forms. Identified on the chart are all of the same parts that 2008 had up until the third bottom. While this doesn't guarantee that we will go one way or the other, it is interesting to see that we have followed the same anatomy almost exactly. There are some key differences to note here, however.
1) Slight Anatomical Differences
08's Bull Market fell out before the long shoulder formed. This year, the two seem to be squished together into one event. This may have caused the slightly malformed Head that we've seen this year.
Currently, we are forming what looks to be an inverse head and shoulders . This may bring us to the upper trendline & above, but I don't believe it will power us to the channel top. If the inverse H&S does not occur, then we may see the bottom fall out quicker than what happened in 2008.
2) Easing v Tightening
In '08, the Federal Reserve was in the middle of reducing rates, not tightening them. Today, due to major inflation , the fed is tightening its grip and attempting to save the consumer economy, the broader economy, and not the stock market. However, the fed is not being aggressive enough to curb inflation . This stagnating economy and major inflation creates a Stagflation effect that will prove devastating to all parties. The last time the USA faced this risk was in 1973 and lasted until 1975. The key difference between today and then is that there wasn't a major asset bubble.
3) Asset Bubble
2008 is infamously blamed on the collapse of the housing market. Today, people are calling our asset bubble the "everything bubble". It is possible that we're facing an everything bubble, and it's possible that we're facing an "anything bubble" wherein it could be any one of these assets that collapse but not necessarily all of them. If the fed really were able to engineer a soft landing, we may only see a couple of sectors collapse. However, with the lowball rate hikes that are coming every Fed meeting, we will likely see a panic at the fed when the effects of stagflation hits and then a nosedive in all markets. A popping of the everything bubble will put us in a similar situation as 1990s Japan. Many, many years of a slow growth rate for the GDP and maybe a "Lost Decade" of our own.
Hopefully, there are some key takeaways in this analysis that some of you may find helpful moving forward.
Bears, we may see another pump. Bulls, it's a long way down. Everyone else, what did you think?
What other differences & similarities are there in these charts?
What did I get wrong, and what did I get right?
Comment and let me know!
& Thanks for reading! :)
Over the course of the last several months, there have been mentions of a possible recession on the horizon. Though some believe the opposite, that we're one major rally from regaining all-time-highs, I believe this is far from reality. If we are to discuss the potential of a stock market crash, it would be helpful to dissect the last recession crash that we had. And - oh, would you look at that. The Ghost of 2008 is floating by! Let's take a look at it and identify some key differences and similarities to today's market.
Bull Market End
We open with a very unassuming uptrend. Things seem fine, but there is a slight kick in the engine. That kick was actually the engine shutting off. The market breaks below its current upward trend for a moment. But this won't deter us quite yet.
Long Shoulder
The market reconsolidates for a moment and gathers up the momentum for one final push. It ends at a new high, and reconsolidates again.
Head
The market tries the same schtick- and it works, reaching all time highs and forming the head of the recession. Keen investors that recognize the first two signals in the market, the trend breakout and retest of the highs, will wait for this second push and sell closer to the top. Smart money exits.
Short Shoulder
Late money recognizes that they missed the mark with the all-time highs, so one last big push is created. Of course, this push isn't enough to send the market to new highs. However, it gives late money a chance to exit. Because these investors don't want to wait, this shoulder ends up being a little more brief.
Channel Bottom (x2)
Now that we've established the top of our bear market, we must establish the bottom. The market will test the bottoms of the channel to see where the edge is, and then confirm it.
Denial Pump
This bear market pump is investors having their midlife crisis. "No, no!" They say, "The party is still kickin', look at us! We're going back to the moon, baby!"
Unfortunately for our permabull friends, the market can only touch the top of the downtrend channel .
3rd Bottom
The denial phase wears off, and we're given a third confirmation of the channel bottom. Even dumb money knows that something isn't right.
Return to Channel Median
A bit of a dead cat bounce, this half-way attempt to reach even the top of the bearish channel will confirm the overwhelming momentum in the market. We may "hover" in this area for a little while before the knees buckle , but then we go straight down.
Breakout Bottom
Unable to retest the channel highs, we're sent back to the channel bottom. This isn't a nice sign for even the most bullish investors, and so they pull out. Seemingly overnight, the market begins to drop like crazy. We break out of the bottom of the downtrend channel and plummet.
Recovery Attempts & False Bottoms
Some believe them to be more clever than the market. These bottom-fishers will catch the falling knife and begin to pump things back up almost immediately. These attempted rallies into normalcy will fail, sometimes many times over during the crash. The market will continue to bounce lower over the next several weeks.
The Final Low
After some time, the market will blow past a seemingly nice recovery and reach a Final Low. When it seems like the crash is happening for a second time, or that "part 2 is coming", that's when it's time to long. The hysteria and panic in this phase will be a sure indicator that either the world ends because the charts look sad or that the rebound is on its way.
Recovery
Finally, we face a market recovery. The rebound brings us higher, and the market enters its new bullish cycle. But this bull run, be it 5 or 10 years from now, will also eventually squeeze
Looking at this past recession and looking at our current market, it does seem that there are some striking similarities in their forms. Identified on the chart are all of the same parts that 2008 had up until the third bottom. While this doesn't guarantee that we will go one way or the other, it is interesting to see that we have followed the same anatomy almost exactly. There are some key differences to note here, however.
1) Slight Anatomical Differences
08's Bull Market fell out before the long shoulder formed. This year, the two seem to be squished together into one event. This may have caused the slightly malformed Head that we've seen this year.
Currently, we are forming what looks to be an inverse head and shoulders . This may bring us to the upper trendline & above, but I don't believe it will power us to the channel top. If the inverse H&S does not occur, then we may see the bottom fall out quicker than what happened in 2008.
2) Easing v Tightening
In '08, the Federal Reserve was in the middle of reducing rates, not tightening them. Today, due to major inflation , the fed is tightening its grip and attempting to save the consumer economy, the broader economy, and not the stock market. However, the fed is not being aggressive enough to curb inflation . This stagnating economy and major inflation creates a Stagflation effect that will prove devastating to all parties. The last time the USA faced this risk was in 1973 and lasted until 1975. The key difference between today and then is that there wasn't a major asset bubble.
3) Asset Bubble
2008 is infamously blamed on the collapse of the housing market. Today, people are calling our asset bubble the "everything bubble". It is possible that we're facing an everything bubble, and it's possible that we're facing an "anything bubble" wherein it could be any one of these assets that collapse but not necessarily all of them. If the fed really were able to engineer a soft landing, we may only see a couple of sectors collapse. However, with the lowball rate hikes that are coming every Fed meeting, we will likely see a panic at the fed when the effects of stagflation hits and then a nosedive in all markets. A popping of the everything bubble will put us in a similar situation as 1990s Japan. Many, many years of a slow growth rate for the GDP and maybe a "Lost Decade" of our own.
Hopefully, there are some key takeaways in this analysis that some of you may find helpful moving forward.
Bears, we may see another pump. Bulls, it's a long way down. Everyone else, what did you think?
What other differences & similarities are there in these charts?
What did I get wrong, and what did I get right?
Comment and let me know!
& Thanks for reading! :)
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