The answer goes beyond simple correlation, but we believe there are at least two factors at work: the ability of an entity to make market-making decisions that are more costly than simple correlation analysis yields, and, to a lesser degree, the ability to identify and exploit short-term market volatility over such extended periods of time. In particular, we think the most fundamental question is whether or not the investment opportunities offered by a speculative bubble can be realized on the scale associated with the dot.com bust.
Figure 1 – The probability of a top (or bottom) stock breakout from a 50-day moving average in 2009. Chart courtesy of the US Commodity Futures Trading Commission.
For instance, just six years ago, the Dow Jones Industrial Average closed below 5,000 for the first time since the Great Depression (Figure 1). That event did nothing to endear the Dow to the public. After all, the markets had been rallying for months on record highs—the Dow and the S&P 500 were in near-record territory! What’s more, while the S&P 500 had finished the 1980s in what should have been some sort of record-breaking bull run, it had failed to follow through even after the dot.com crash that ended its bull run.
Figure 2 – The probability of a top (or bottom) stock trading on a 50-day moving average in 2009. Chart courtesy of the US Commodity Futures Trading Commission.
By 2008, that event had finally been overcome: the Dow had topped 5,000, and the S&P was at or near its all-time high. But the dot.com bust also put the S&P back in recession for the first time since the 1970s. Meanwhile, with the NASDAQ in the midst of a run-up that it never really recovered from, the stock market was starting to lose its nagging sense of direction as investors began to believe that the market might continue to rally until it was time to sell a bit.
Then the economic world blew up. The global financial and economic meltdown of late 2008 did nothing to help the market in its long search for an equilibrium. To get there, investors were forced to take more risky bets. Over the next several years, the NASDAQ rallied from 8,000 to near the all-time high of nearly 20,000. However, by 2011, it had already peaked. The stock market was beginning to look very similar to 2008’s top-heavy stock
swing trading strategy guide ally financial address, best swing trading software rated k, swing trading strategy guide ally financial services, swing trading rsi, short swing trading definition francais respiration