The absolute collapse in erstwhile momentum favorites like the ARK Innovation (NSDQ: ARKK) ETF, Bitcoin and meme stocks has garnered a lot of attention this month.
With Bitcoin down as much as 58% from its late 2021 highs, ARKK collapsing under $40, down 72.1% from its all-time highs in February 2021 and “meme” favorite Gamestop (NYSE: GME) down 76.6% from its highs could we be close to a bottom?
After all, when the last big growth bubble burst in 2000, the Nasdaq Composite’s entire bear market decline was 77.6% between 2000 and 2002, so some of these former momentum darlings are getting close to declines of that magnitude.
However, that’s just not how bubbles work – history suggests there’s more downside – likely a lot more downside – to come in this bear market.
Let me explain with a chart:
Source: Bloomberg
Microstrategy (NSDQ: MSTR) and Qualcomm (NSDQ: QCOM) were in the top 10 of all Nasdaq stocks ranked by percentage returns in the final year of the bull market in 1999-2000.
As you can see from my chart, both stocks rose close to 2,900% from early June of 1998 to their peaks in early 2000 – the actual peaks were in January 2000 for QCOM and March for MSTR.
By the end of March 2001, where I’ve ended this chart, QCOM was down almost 70% from its January 2000 peak while MSTR was down more than 99% from its peak in March 2000 (yes, the company DOES still exist though it’s still down 93.5% from that 2000 peak). In other words, these stocks faced declines from their bubble-era peaks that are roughly in-line with what we’ve seen for names like ARKK and GME in the current cycle from their highs early last year.
However, this point is crucial:
March 2001 was not the end of the bear market in that cycle. Both the Nasdaq and S&P 500 continued to decline for more than 18 additional months, until October 2002. From the end of March 2001 through to the October 9, 2002 ultimate closing low, the S&P 500 fell an additional 30.97% and the Nasdaq Composite shed an additional 38.96%.
In other words, the collapse in momentum favorites in 2000-01 like MSTR and QCOM marked the beginning and NOT the end of the bear market.
Much the same can be said of the 2007-09 cycle:
Source: Bloomberg
Remember California-based mortgage lender Countrywide Financial run by the permanently tanned Angelo Mozilo?
The stock was one of the darlings of the US real estate bubble of the mid-2000s and ran up about 250% from the end of 2002 through its peak in 2007.
However, as you can see from the chart above, Countrywide collapsed at the end of 2007 and into early 2008 – from the peak close on February 2, 2007 to the end of March 2008, CFC shares had declined more than 86% and were trading below the levels of late 2002 at the beginning of the bubble.
However, that wasn’t the end of the 2007-09 bear market, it was just the beginning – from the end of March 2008 through the lows in March 2009, the S&P 500 collapsed an additional 46.85%.
I’d be shocked if we didn’t see a significant bear market rally kick off at some point over the next month or two. However, don’t be fooled by the dramatic declines in momentum darlings like ARKK, Bitcoin and Gamestop, if history is any guide, this bear market is still in the early stages and rallies represent selling opportunities.
I’ll continue to follow the shorter-term indicators, including some covered in this Free Market Speculator post “Where’s the Panic” from early March, for signs that we’re close to a tradable low.
If you’d like me to cover any specific topics or stocks in this publication, please drop me a comment below:
DISCLAIMER: This article is not investment advice and represents the opinions of its author, Elliott Gue. The Free Market Speculator is NOT a securities broker/dealer or an investment advisor. You are responsible for your own investment decisions. All information contained in our newsletters and posts should be independently verified with the companies mentioned, and readers should always conduct their own research and due diligence and consider obtaining professional advice before making any investment decision.