The following is the S&P 500 chart in 2000.
Our model predicted that the S&P’s bull market would end in April 1999, almost a year before the S&P 500 did top. Although the S&P proceeded to rally 15% in the year after April 1999, our market call was worthwhile since the S&P fell more than 50% in the following 3 years.
Although the exact top was on March 24, 2000, the S&P actually made a flat top for most of 2000. The S&P only started to go down in September-October when the U.S. economy started to deteriorate significantly.
There’s a simple reason why our model was so far from the bull market top. The bull market that ended in 2000 stretched the very definition of a “bubble” to the max.
This bull market was driven by the NASDAQ due to the dot-com bubble. After the Russian crisis of 1998, the NASDAQ went parabolic from October 1998 to January 1999. Then it went up in a very choppy fashion from February – October 1999, which chartists know as a T1 bullish flag pattern. Then the NASDAQ went parabolic again from October to December 1999. But the bull market didn’t top there. There was a small pullback in January 1999 (weekly red bars on a log scale chart). This is normal. History shows that when a market goes parabolic, it doesn’t just die. It makes a pullback/correction and then either makes a double top or a marginal new high.
Here is a weekly chart of NASDAQ during this period. Log scale.
Q4 1999 earnings season was good (released in mid-to-late January 2000). Tech and finance earnings were good. The banks had a great quarter because Glass-Steagall was repealed in the summer of 1999 (less banking regulation = lower costs and higher revenues for banks). However, the S&P fell.
There was no reason at all for the 10% correction from January 3 – Feb 28 2000. The earnings season was good and economic data during this period was strong. However, the S&P sold the news. The media said “the market is falling because it’s afraid that a strong economy means the Fed will hike rates more than expected”. We know that this is a BS excuse. The S&P rallied from 2004 to 2006 even though the Fed hiked rates at every meeting during that period.
There was a major divergence between the NASDAQ and S&P during this correction. The NASDAQ kept going up in February – early March, while the S&P sank in February. Only in late-February to early-March did the S&P go up with NASDAQ. The S&P surged to new highs while the NASDAQ was completely flat from early-March to late-March.
This odd-correlation is part of the reason why the S&P rallied in a very choppy manner from 1999 to Q1 2000. On some days the Dow would go down when the NASDQ went up, and on other days the Dow would go up when the NASDAQ went down. This is very rare and had never happened before in history. This phenomenon was due to the “new economy” BS theory. Irrational investors believed that “new economy” internet companies would annihilate the “old economy” companies.
This 10% correction also bottomed without any fundamental reason / news.
The U.S. economy was strong until the summer of 2000, a few months after the S&P 500 topped. This is one of the rare instances in which the S&P topped before the U.S. economy deteriorated. However, 2000 was basically a flat top with a marginal new high in March.
March 24, 2000: Bull market top. There is no way one could have predicted the timing of this top.
March 24 – April 14, 2000: The NASDAQ crashed from late-March to early-April. The S&P fell 13.7% while the NASDAQ fell 37.1%.
April 4, 2000: A federal judge ruled that Microsoft had violated the Sherman Antitrust law. The government’s attempt to breakup Microsoft under the Sherman Antitrust Act in the first half of 2000 did not have a significant impact on the S&P or NASDAQ. The NASDAQ fell on some days when Microsoft tanked on news about the court proceedings. But on a week-by-week basis, this case had no impact on the S&P.
The S&P fell again in May, almost retesting its April 14 lows. This is because the NASDAQ fell again and made a marginal new low (almost a double bottom). This was purely a technical retest of the April crash, which is normal. Post-bull market crashes tend to retest the crash’s low (see silver in May 2011). There was no news/fundamentals that caused this selloff.
The NASDAQ proceeded to bounce in June. This was the standard 50%-61.8% retracement of post-bull market crashes.
Our economic model shows that the U.S. economy started to deteriorate by June-August 2000. The deterioration had become very severe by September-October. The financial media noticed this phenomenon as well by September. That’s why the May 2000 Fed rate hike was the last rate hike of that cycle.
Q2 2000 earnings season was good (released in July), but the S&P fell a little on these earnings (again).
Here’s another example of how dumb the financial media can be. The media said in July and August “Yay! The economic data is going down! This means that the Fed won’t continue to raise rates, which is good for stocks!”.
- Rate hikes have no impact on the S&P in the medium-long run.
- The economy slowing down is not good for stocks, especially once all the targets for a bull market (according to our model) are met.
From August to the first half of October (right before earnings season), pretty much every company came out and said that future earnings would miss expectations. Analysts rapidly downgraded their expectations. The stream of bad warnings first came out as a trickle in August. By the first half of October, major companies came out every day to beat the drum on earnings warnings. So by October it was clear that the bear market would begin in earnest. The U.S. economy was going down and so were earnings.
The S&P bounced in the first half of October to early November on 2 reasons:
- When the S&P falls a lot before earnings season (as it did in September and early-October), it almost always bounces on earnings season, even if the earnings reports are bad.
- Q3 2000 earnings season was surprisingly good! A lot of big tech and financial companies beat estimates.
The NASDAQ crashed through its April-May 2000 low (previous support) in November-December 2000. However, the S&P only made a new low in mid-December 2000.
December 5, 2000: In a speech he delivered, Greenspan acknowledged for the first time that the U.S. economy was slowing down. Previously in the first half of 2000, Greenspan focused on the tight labor market and inflation. The Fed’s outlook always lags the real-time state of the economy.
There was uncertainty over the result of the presidential election between November and the first half of December. The S&P would rise/fall with election updates on some days. However, this uncertainty had no impact on the S&P in the medium term.