Friday’s big plunge in the stock market has raised disturbing parallels with the top of the dot-com bubble, according to MarketWatch columnist Mark Hulbert. The Nasdaq Composite Index lost 748 points, or 2.9%, in a rout that bears a striking resemblance to how the bubble behaved in 2000.
Nasdaq trading (Credits: MarketWatch)
Nasdaq’s Rough Ride vs the 2000 Top
Big one-day plunges far more often than not occur during bear markets, Hulbert notes. Of the 50 biggest one-day Nasdaq plunges since 1971, when the index was created, 42 of them — 84% — occurred during bear markets in the calendar maintained by Ned Davis Research. Since only 25% of all days since 1971 were in one of those bear markets, big one-day plunges are associated with three-times-higher odds of occurring during a primary downtrend.
Many investors labor under the illusion that the Nasdaq plunged almost immediately after hitting its all-time high on March 10, 2000, Hulbert writes. In fact, the index was relatively flat for the first three weeks after that high — and only then did the bottom drop out. Today’s Nasdaq, by contrast, is only 5.1% below its all-time high from three weeks ago, which complicates a simple “bubble bursting” reading.
One Key Difference: Market Timers Are Not Stubborn This Time
One bright spot, per Hulbert: Nasdaq-oriented stock market-timers have gone to cash quickly. Such stubbornness was very much in evidence at the top of the dot-com bubble — the Hulbert Nasdaq Newsletter Sentiment Index (HNNSI) actually increased in the three weeks after the 2000 peak. Today, the HNNSI has dropped 76 percentage points over the past three weeks and stands at just 6.2%, indicating these timers are on average almost completely out of stocks.
The next several weeks will therefore be a test of contrarian analysis. This is a report of MarketWatch’s analysis of market data — not investment advice.
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Source: MarketWatch — read the full story there.
