November 6, 2008

By a Waterfall, I'm Calling You-ou-ou-ou

Wildly inflated stock markets, writes Donald Coxe, fall in a recognizable pattern. There are "Six Stages of the Triple Waterfall," as Coxe shows in the following chart recording the rise and fall of the Nasdaq from 1997 to 2002.

Previous periods---The Great Crash of 1926-1933, The "Nifty-Fifty" market of 1972-1982, and the "Inflation Hedges Crashes" of 1977-1999 (in gold, silver, and oil stocks)--display this "tripartite waterfall stock chart pattern." The classic stages of the advance--what Coxe calls "optimism, faith, and fanaticism"--are paralleled on the downside, with two bouts of false hope when the nimble can get out while the getting is good, but which are followed by more eroding value on the way to long-term collapse.

It's a sound theory. It does fit many previous market episodes. It may yet, in some fashion, come to resemble this one, if we give it enough time. At the same time, the crash of 2008 would seem to fall outside these parameters in one basic respect.

Stocks in alternative energy and junior resources didn't fall 50%, rally 25%, fall another 50%, then rally again, in the two to three year sequence that marked past crashes. I mean, they just fell through the floor and kept on truckin,' taking back in three months the gains of seven years, with 80-90% falls in individual stocks altogether common. By comparison with the above charts of the Clean Energy Index and the Venture Exchange, the fall of the Nasdaq from its high in April 2000 to its low in the fall of 2002 seems positively tame.

Coxe was doubtless shocked by this development, having been a resource bull throughout this decade. It was one thing for crazed home builders and reckless banks to fall through the floor. But energy? We were supposed to be running out of that.

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