The enormous rise in prices which ended in year 2000 was a Mania, a stock Mania.  The first move down after the end of the Stocks Mania marked the beginning of a new major trend, a downtrend this time, which has many months – perhaps extending into years - yet to run.  That first move down ended with the 2002 lows.  The subsequent high which ended in October 2007 was the first bounce in the new major downtrend.  It was exhilarating, wasn’t it?  “Happy days are here again.”  “It’s the New Economy.”  “The old rules don’t apply anymore.”  “This is a New Era.”  “This is a new paradigm.”  It’s hard to understand or believe; but the reality is that the rally from the 2002 lows to the October 2007 high was a bull rally in an underlying bear market.  It was fake from the word Go.

The thing to bear in mind about Manias is that they are always fully retraced.  In other words, prices eventually collapse to a point at, or below, their level before the Mania began.  We remember reading about the Tulip Bulb Mania and the South Seas Mania.  That’s exactly what happened to prices after those Manias ended: they collapsed.  By definition, Manias are irrational.  When one is living inside a Mania, nothing seems irrational at all; everything seems normal, “just as it should be.”  It’s a mass delusion.  Leading up to year 2000, most people were thinking along the same lines, a crowd in full cry, reinforcing each other’s beliefs in circular fashion.  Round and round the wheel went, and with every turn it received another jolt of artificial methamphetamine which kept the party going.  Lonely contrary voices were few and far between, and were ridiculed as crackpots.  Even the smartest and the soberest were taken in.

If you can come to believe that Manias always eventually fully retrace, then you may come to conclude that stocks are in for a very rough ride.  Where would you, yourself, pinpoint the start of the Stocks Mania?  Well, stocks REALLY began to take off in 1995.  If you think it was later than 1995, then what date would you point to as the date of the spark which set off the Mania?  And if there was no particular spark between 1995 and 2000, then would you agree to settle on 1995 as the beginning of the Mania?  Fair enough.  Just recall that, at the beginning of 1995, the Dow was at 3800.

3800!

And if the spark that lit the Stocks Mania occurred before 1995, say right after the Crash of October 1987, the Dow was at 2000 then.

And if it occurred earlier, say August 1982, well…..

No one is required to believe this scenario as Gospel.  Think for yourself.  But if you’d just mull it over as a possibility and keep your wits about you in the coming weeks and months, you’ll be ahead of at least 90% of the rest of the investing public who make investment decisions almost entirely on emotion, and have no evidentiary clue about where prices will likely go tomorrow morning, let alone next week.

Tags: finance, mortgage