Topping Like It's 1999? History Repeats Itself
Philosopher George Santayana once wrote “Those who cannot remember the past are condemned to repeat it.” But is it really true? Is it human nature to believe that "this time it's different" or that the past is irrelevant? What is it about humans to completely disregard the mistakes of past generations? Why is it that we just can't get the lesson? Why is it that we must experience the lesson first hand to fully grasp its' meaning?
In 1982, Prince called on the world to "Party Like It's 1999," and indeed, investors did party seventeen years later as the Nasdaq went on an historic and climatic run into the year 2000. Now, what do a pop icon and a philosopher have in common? Everything if you were a stock trader in 2021.
When looking at the weekly charts of the Nasdaq 2000 top and Cathie Wood's ARK ETF, the similiaries are striking. The Nasdaq hammered off its' lows during the 1998 bear market while ARKK hammered off its' lows as the market bottomed during the COVID-19 bear market. Both then rallied strongly and held their 10-week lines as they began their uptrends. Both then slowly moved higher in an ascending base type manner before picking up momentum. After topping during euphoric runs, both lost their 10-week moving averages on strong moves lower. This was followed by choppy, failed rallies near the 10 and 40-week lines as the 10-week moving average then crossed below the 40-week moving average signaling, the line of least resistance was now to the downside. Like the Nasdaq in 2001, ARKK now looks to be in serious trouble and will most likely unwind further in the coming months.
The next logical question becomes, "Why does this happen?" Why are there such similiaries? The key to this phenomenon is to understand that human nature never changes. Fear and greed are two of the strongest emotions speculators experience, and this drives the market. First, fear as the market crashed in 1998 and then again in early 2020 as COVID held the world hostage. Next, greed took precedence as easy money drove the market into historic tops in both early 2000 and early 2021. Now, we are in the complacency phase as the average investor has gotten accustomed to markets near all-time highs and buying the dip. Buying the dip is a great strategy until it stops working, which is always the way it ends.
While emotions will always be a part of trading, it's good to look back at the similarities of past markets. And next time you find yourself in an euphoric market, remember that Prince was right when he proclaimed "parties weren't meant to last."
Risk right. Sit tight.
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