Irrational Exuberance During Trump Rally Exceeded All Records! We’re sailing into a massive stock-market crash.

By Neuroxic (Own work) [CC BY 4.0 (], via Wikimedia Commons

If I can show you that economists, central bankers and stock analysts are blind in the area of their expertise to the most obvious setup for disaster ever, then you’ll realize we are perfectly poised for potentially the greatest stock market crash in history. Many times in the past few months, I’ve heard these people say that the present bull market cannot crash spectacularly yet because we have not seen the kind of irrational exuberance that is required to set things up for such a crash. I shake my head in amazed disbelief as I listen to the most irrational nonsense about a stock market rally that was by far the most exuberant we have ever seen!

When the end of the financial world comes, it comes quickly. Because of the irrationality that allows such events to build up, it also comes unexpectedly to the majority of people in the financial world (and to others). The one essential ingredient for a truly massive financial crash is that almost no one sees it coming.

Simply put, the higher and steeper the rise, the more spectacular the fall; but the market and the economy it is operating in have to be rickety in order for things to go down like a house of cards. For that kind of situation to develop, market analysts have to be blind to the flaws around them (which looks completely irruption to those who can see). Otherwise, they’d be counseling everyone to get out of the market, not to keep bidding it up into the stratosphere, and so the market would never rise to such absurd heights in such a perilous situation.


Trump Rally displayed irrational exuberance with the worst possible timing


We are now exiting the longest period of central bank stimulus in the history of mankind. As that time dragged on, central banksters began to see nothing but diminishing returns for all their extravagant money printing, known as quantitative easing coupled to the lowest interest in the history of the modern world. So, the Trump Rally happened just as we are exiting a time when even central bankers know their ability to save a falling market or a failing economy is more limited than ever before. Their old tricks for recovery are ceasing to work because they are played out, and the banksters know it.

The knowledge that their usual tricks have lost potency is pressuring the governors of the Federal Reserve to get out of stimulus mode quickly now so that they have something they can throw at the next downturn that is not already in play and completely exhausted. The economy needs a rest from stimulus if the next round of stimulus is to have any shock value. It doesn’t do any good to just hold the shock paddles of the defibrillator on the patient’s chest and administer a continual shock. The defibrillator needs to recharge and then hit suddenly in order to have any shock value to a dying heart.

The law of diminishing returns, like entropy, trumps everything — even Donald Trump — and the Trump Rally has exhausted itself just as the Federal Reserve has determined that it has to remove the shock paddles and give the defibrillator time to recharge. So, stimulus is coming off just as the stock market fades out.

Not only has the rally ended, but the Federal Reserve’s recovery is going into cardiac arrest just as the board of governors are putting the defibrillator away. Figuring out whether the currently now unfolding collapse of the Federal Reserve’s “recovery” is due to the stupidity of central bankers (to have ever thought money printing would work in a world rife with examples of its catastrophic failure)) or is due to a bankster conspiracy that is plotting to force a new monetary paradigm on the world, doesn’t matter for our understanding of what is about to happen. The only difference that conspiracy adds is that it means people need to go to jail at the end of all of this. I’ll leave that for others to decide when the dust settles.

What matters right now is that I convince my readers how extraordinarily exuberant and remarkably irrational the present bull run in the stock market became during the Trump Rally. Because, if you can see that, you’ll recognize the end is here, and you might be able to exit before the rush when the exits become so jammed that no one else can get out.

Those who understand basic economics (such as diminishing returns) and who can learn from stock market history will be able to see that the Trump Rally ends in disaster and that it’s not Trump’s fault. (Though the globalists will certainly capitalize on the opportunity to say that this completely foreseeable disaster was due to Trump and his supporters.)

The truth is that the disaster was baked in long ago; that’s why I can tell you it is coming and have been saying for many months that it would show up in June or July. Whether by the sheer stupidity of banksters who have ascribed to fantasy economics or by nefarious design, the Fed’s phantom recovery is fading right as the Fed ends the life support that created the appearance of recovery. That is characteristic form for the Fed.

My position for the past decade has been that this patient (the economy) was only kept alive after the official part of the Great Recession by artificial life support and that it would die when support was removed. Clearly, the doctors of disaster are now stripping that life support away, even as the patient goes into his final paroxysms.


The Trump Rally displayed the most exuberant irrational exuberance ever seen in the stock market


That’s the amazing part that leaves me standing in utter bewilderment as the economic gurus of our time say the stock market cannot crash because we have not seen the kind of irrational exuberance that precedes such an end. The rise in the stock market that happened during the Trump Rally was far greater and far faster than any seen in history! And it is so easy to see and to prove on an historic graph.

Of course, the rise in cash (liquidity) that the Federal Reserve is determined to remove was also far greater and far faster than at any time, which is why the market has been so irrationally exuberant. The market has never been this juiced for this long, and it was all built on the Fed’s free money, now quickly fading away. Look at the worst market crashes and the bull runs that preceded them, and you’ll never see a sharper, more exuberant upturn at the end of those runs than the Trump Rally. NEVER! I’ll prove it below.

Please show me a time on any graph of the stock market where we have EVER seen an exponential rise as steep and prolonged as the Trump rally. I repeat myself because it amazes me that people can be so blind in the area of their overrated expertise. How much more euphoria can you possibly expect than what we just had, given that it exceeds ANYTHING in the history of the stock market?

Now the market is flatlining, the euphoria has ended, but that, too, is typical of all major tops before major crashes. None of them instantly blew off and crashed. The fall of the cliff has ALWAYS come after a short term of a few months during with the top flattened out, usually followed by a choppy downward turn, and FINALLY the market suddenly leaped off the cliff a few months later later. We’ve had three months now of such a top. So, the end is fully poised to happen.

Let’s prove it now. Look at the last last thirty years of the Dow in the graph below and particularly at the run-ups to the two greatest crashes during that time — the dot-com crash that unfolded slowly at the change of the millennium and the Great Recession that began at the start of 2007. They both show “exuberance,” which means the steepness of the bull market suddenly increases in a sustained manner, and they both flatten out at the top for a time after that exuberance and then tilt downward before the big crash comes. Here are the three periods of greatest irrational exuberance in history:


Periods of greatest irrational exuberance during bull markets on the Dow


Note that the sharpest increase in the pitch of any bull market happened during the last half year (the Trump Rally)and has just topped out. It is is more euphoric than any other rise on the graph. That is to say the Dow rose much more steeply during that rally than during ANY other period in history. It is the steepest rise in the entire history of the stock market, and it continued that rise for as long or longer (not in months but in height attained) than any other sharp rise in the history of the Dow. (I use the Dow because it has the longest history of any index, and you know that the history beyond the left border of the graph is minuscule in its ups and downs compared to recent history. Even the Great Depression happened within a much shorter range of highs and lows.)

Clearly, before each major crash, the pitch of the market steepened for a heroic last hurrah. The last hurrah is now in! It’s fully there. You can see it. It’s gained as much altitude as any hurrah that ever preceded it. The fact that it did so in half the time of all previous euphoric bouts only makes it ALL THE MORE EUPHORIC!

And look at all the tops after those periods of exuberance. Never did the stock market just immediately plunge over the cliff. Instead, we see it rounding off or flattening out, just as it has in the past few months. Then it trends downward for several months or even a year before it finally takes the big plunge.

Again, I repeat myself because so many experts are failing to see this, and it SO OBVIOUS! There is nothing more irrational than experts coming out of a period of the most extreme exuberance in history and not even being able to see it at all.

Since the Trump Rally was clearly the largest burst of irrational exuberance in history, there is certainly no need for another burst before the big crash and it would be unlike any previous crash if the market did put in another large burst of euphoria. It could happen, of course, but there is no need for it to happen before the next big crash because what has already happened exceeds anything we’ve ever seen. Even the ramp up to the dot-com crash, where Greenspan coined the term “irrational exuberance,” was not as steep or as protracted as the Trump Rally.


The Trump Rally displayed the most irrational irrational exuberance ever seen in the stock market


The graph above proves the exuberant part, but now let’s examine this irrational aspect. The Trump Rally — sprint to the stratosphere that it was — was clearly built on nothing but hot air. It was based entirely on the mere hope that President Trump’s big fiscal stimulus plans will come into effect, and it continued to rise even as every one of his major plans (his big campaign promises) either failed in congress or in the courts … just as I said was likely many months ago … and as continues to be the case.

If a market’s period of exuberance (any market, housing, stocks, bonds, whatever) is all based on campaign promises, we ALL KNOW such promises rarely turn out as promised. No group of people is more notorious at failing to deliver their promises than politicians. So, it is irrational to invest based on a politician’s promise, especially when you already see that politician flip-flopping on nearly everything he has said, AND you see his own party members fighting him in congress and the other party unanimously lined up against him. This rally was entirely based on the promises, not on anything that was actually happening. There was no REAL change to merit a surge in the market, and very little likelihood that the hopes would materialize.

Moreover, those promises would have to materialize in nation that is more sharply divided politically (on the streets and in congress) than it has been since the Great Society changes of LBJ. So, those promises face huge political battles, which they must overcome before they ever become reality. Nothing defines irrationality like the resolute belief in a reality that does not exist and has more than half the nation united against its ever happening! (I.e., not just Democrats, but a good number of NeverTrumper Republicans who for the first time in history voted against their own party member and voted FOR a president from the opposition party.)

That the market would rally during such unlikelihood speaks of a phenomenal level of irrationality driving its exuberant climb. This market has risen more quickly than ever into thinner atmosphere than ever based entirely on hot air. All it needs in order to crash is for the hot air (Trump’s plans) to fail, which they have every likelihood of doing and, so far, is the only thing they have done!

Add to that scenario the fact that many experts who are looking at this picture are saying, “We still need to see some sign of irrational exuberance before this bull market crashes,” and you have the most spectacular irrational blindness in the history of the stock market.

As the graph proves, exuberance has never risen higher, more quickly on such faint and unlikely hopes than it has now. Add to that the fact that fundamental economic indicators were turning downward during that rise in a way that would cause a rational market, in the very least, to hesitate, if not drop; yet it soared. (See my “List of Seven Troubles Assailing the US Economy as We Head into Summer.”) Add to that the fact that stimulus is being shut off and the Fed has just begun talking about winding down its balance sheet. Add to that the fact that even the world’s leading market analysts see no sign of irrational exuberance in that kind of scenario; then, clearly, irrationality has reached its zenith.


Folks, irrational exuberance is all in, so the stock market is poised to crash!


This market has lost any grasp or concern whatsoever about fundamentals. Thus, I was not suggesting in the article just referenced that the market would fall because of how it responds to fundamentals that are now going down, but exactly the opposite. It will crash severely because it has no grasp of fundamentals whatsoever, and is flying like a hot-air balloon into a cold storm. But fundamentals still fundamentally matter because they are reality. Those who are out of touch with reality, get slammed by it because it happens whether they believe in it or not. It doesn’t wait for their acknowledgment of its existence.

So, as auto sales tank, home sales start to slide, the promise of wage growth fails to materialize, commodity prices drop (particularly oil and copper and iron) because China cannot sustain its outlandish construction spree (see referenced article for all of that) society becomes more discordant politically, and the Fed starts subtracting cash from the market, then reality will eventually crush the exuberance out of the market by taking American corporations deep into the red. We’re seeing it now with automakers, and may be about to see it in housing (too early to know for sure if April was a change in trend or a one-off).

It is when reality becomes so crushing that it forces knowledge upon us that markets suddenly leap off a cliff as denial finally breaks. They don’t fall. They leap as panicked investors jump for their lives.

Economic fundamentals are falling apart right when I thought they would. The fact that they are collapsing immediately after the most stunning rise of irrational exuberance in market history is why I’ve predicted the economy and the stock market will crash this summer. Exactly when that breaks through market denial into the big leap, I don’t know; but I’ve predicted that happens sometime between June and January of 2018.

The economy will continue to force companies out of profit and into trouble until irrationality (economic denial) can no longer hold up to the crushing reality. In the present case, the level of denial is so much greater than we’ve ever seen that reality is going to have to crush hard in order to break through the denial.

Stock market crashes do not ever play out all at once. So, don’t expect just because I’ve predicted the crash will begin in June or July that the stock market is just going to go BOOM! off a cliff. Historically, the stock market has never fallen that way. Look again at the chart above, and you will see that the tops after the period of irrational exuberance can run horizontal for a long time or take a bumpy ride that rounds ever more steeply downward. They decline from a peak for awhile before reality overcomes investor denial and all the investors finally leap off a cliff like lemmings in what becomes that 20%-or-greater plunge that crashes become famous for (the Black Monday, Black Tuesday or October Surprise kind of event), which technically turns a bull market into a bear market.

So I don’t know exactly how and when the stock market will fall apart, but my point is that the chemistry for a crash of epoch scale is finally all in … right at the start of summer, which is when I predicted the chemistry for a crash would all be in play — peak irrationality during the market’s sharpest rate of rise in history at the market’s highest peak in history, ending against a falling economy in a time of extreme political disparity and social turbulence while the Fed is reversing stimulus and removing liquidity. It’s about the worst mojo you could ask for.


History repeats itself because we’re irrational


Fitting another historic norm, the Fed doesn’t see that its interest rate increases will help trigger the disaster that is already unfolding. It will once again unwind its stimulus into a falling economy. (That, or it wants to push things over the edge as a conspiracy to force monetary change upon the world and start a whole new tier of robbing from the middle class to stuff the bellies of the rich under a new paradigm — the old having gone as far as it can).

Even if the Trump stimulus plan happens, it’ll come far too late.. And, with or without the Fed’s help, the crash is going to play out between now and the start of next year. It’s just a question of how big and close together the chunks are by which it goes down. As you can also see in the chart above, epoch crashes take a couple years or more to play out completely.

Double steep climb combined with double irrationality for as long of a run of that kind as we’ve ever seen at the same time that the market is priced about as rich in view of actual earnings as we’ve ever seen and richer in terms of total market value than we’ve ever seen makes this the highest risk for a historic crash we’ve ever seen.

And, yet, the professional market bulls (the investment analysts) say, “Where’s the irrational exuberance? We haven’t seen any of that yet! We can’t have a huge crash without that!” So, I think, Oh my gosh, Dude’s, can you really be that dumb? You’re standing up to your eyeballs in a manure pile, and you’re so irrational you can’t smell the stuff that’s already covering your nose or see it while it laps around your eyelids. Surely, this is set to be the biggest wipeout in history when irrationality is that severe.

I think of Ben Bernanke in 2008, standing in the middle of the second greatest recession in US history telling congress, “So far, there is not a recession anywhere in sight!” Then, after the first quarter GDP numbers for 2008 were revised and the second quarter numbers came in, we all found out that he (and we) were in the middle of a recession that had begun half a year earlier! It was something I had no doubt we were in, but the nation’s top expert couldn’t see it to save his soul, and real estate experts at the time argued with me that I was nuts!

In November or December of 2007, I was absolutely certain the housing market was entering its worst imaginable crash, yet Ben Break-the-banky was still convinced in June or July of 2008 that housing would keep rising as would the overall economy. It was all rosy in his view.

I was so certain in 2007 of an imminent housing market collapse that I told my wife to push her family to sell the small estate they had been holding on to immediately, even if it made them really angry with her — to do all she could to force their hand because they’d be REALLY THANKFUL they did within just a matter of months. (They had been holding on to it because the housing market was rising so exuberantly that just sitting on it, rather than selling it and dividing it up, was the best investment they all could hope for.)

I told her that housing was on a breaker that was going to destroy the banking industry on a global scale within months! I convinced her that it would be the worst thing WE had ever seen (having not lived through the Great Depression). Half a year later, Bear Sterns went down. Three months or so after that Lehman Bros. died, and the rest is history; but ol’ Ben Bernanke was singing of eternal glory days for housing all the way up to a month before Bear Sterns died. Fortunately, her family sold the estate before all of that went down.

We are poised now on the brink of a collapse even worse than that. Whether the big part of the crash happens this summer or doesn’t become real evident until the end of the year, I cannot say any more certainly than I did back then. I only knew then that it would be a matter of months, not years, as I do now. The situation is already perfectly poised. The irrational exuberance has taken place, and the cracks in the overall economy are already becoming evident. It is just a matter of how long it takes before everything falls.

We are sailing in a hot-air balloon into a dark storm, the likes of which we’ve never seen, and the Fed is shutting off the fuel to the burner that is the only thing that has kept us afloat in our passage over the Great Recession. They are largely out of fuel anyway; so, even if they turn it back on, we won’t get much more than a sputtering flame and couple more minor bounces on our journey down.

And, in case you just cannot bring yourself to take my word for it, here are the parting words of an old-world market analyst and economist retiring after 47 years who parts with “a scathing critique of capital markets, modern economists, central bankers, and everything else that is broken in today’s society.” It is a must read for all market participants, as well as economists, politicians and central bankers: “After 47 Years, Stephen Lewis Calls It Quits In A Scathing Critique Of Modern Markets.”

Yes, folks, it really is that bad, and the ignorance (or irrationality) of economists that let us fall into the Great Recession, as Stephen Lewis rants about, remains as dim-witted now as it was then. Due to economic denial, arrogant economists learned absolutely nothing from their embarrassing and colossal failure to see the worst economic event in their lives as it was unfolding, and now they are joyfully cheering the nation into the next storm once again. Enjoy the remaining ride while you can because it will be short and downward for a long, long way.

The greater the height, the greater the fall. The greater the irrationality, the more likely the fall.


UPDATE: Logarithmic Chart of Periods of Irrational Exuberance before a US Stock Market Crash


In response to a few complaints below that the chart above was not logarithmic, I’m adding one. A logarithmic chart attempts to graph the market as percentage gains versus straight point gains and to make those runs that are the same size in terms of their percentage of the market’s total height comparable to each other visually. In other words, a rise of 100 points back when the total value of the Dow Jones Industrial Average (DJIA) was only about 10,000 (before the dot-com crash) is more significant than a rise of 100 points now that the market has reached 20,000. The first is o.1% of the market’s total; the second is 0.05% of the market’s total.

So, here is a logarithmic chart:



Exuberance would show up as steepness (the rate of clime). You can still see all the same points, though the emphasis changes slightly:


  1. Each crash period was preceded by a period where the market ran sideways erratically before it started to go down. With the dot-com crash around the change of the millennium, it traded sideways for a couple of years before it really fell off a cliff. With the Great Recession, it ran sideways for about half a year before it began to seriously fall.
  2. The rallies (periods of irrational exuberance) before each of those flat areas are the markets steepest long gains anywhere along the graph that took the market to essentially its highest point for years to come.
  3. Even expressed logarithmically, the Trump Rally is steeper (more exuberant) than the rally just before the Great Recession crash. It is maybe a little less steep than the rally before the dot-com bust.
  4. There were actually two rallies that reached this level of irrational exuberance very close together before the crash into the Great Recession and before the dot-com crash. The Trump Rally was equal to or larger than either of them taken individually. If you take them together (as I have circled them), then the Trump Rally is shorter, but it’s also steeper in that case, since the two combined had a lag in the middle.
  5. Another thing to note is that trading volume (the lower part of the graph) rocketed upward during the Trump Rally to match the exuberance in participation that is typical of other bad times, much more so than is typical during the more normal bull market stretches. Again, and indication of exuberance (of more buyers and/or bigger purchases being made in a given time frame).


Interpretation here is a little hard as to what makes a fair comparison. With the lead-up to the dot-com crash, I circled the rally at the point where it had recovered from a prior crash BECAUSE there is a break where the rally flattened out for a couple of months before starting a second rally and because that is the only case where the rally started right after a huge drop and because the rise out of a v-shaped trough almost always matches the fall into it anyway; so, I’m more interested in what happened in that case after the market recovered from its big loss. If you measure it from the very bottom on a logarithmic scale, it would be greater than the other two. Even if you include both rallies as one, since they are so close together, that still leaves them the same size as the Trump Rally in total points (i.e., on the non-logarithmic scale).

The point is that the Trump Rally is handily comparable to our two best-known, most-talked-about periods of irrational exuberance, even when expressed logarithmically. So, to say, “The market cannot crash because we have not yet seen a period of irrational exuberance” is to choose to be blind to the obvious exuberance of the Trump Rally that went far above the norms of rallies at other times as shown by either method of graphing, though especially if expressed as total points gained, not as a percentage of the market’s already achieved height.

That’s where I will note that there is nothing holy about using a logarithmic scale to assess the size of the rally: On one hand, it makes sense because clearly a 100-point gain back in the days when the stock market was only 1,000 points was a bigger deal than a 100-point gain today. It was 10% of the market. Nevertheless, a 100-point gain today is still a big deal. On the other hand, it makes no sense from the solid reasoning that it is clearly much harder to take something massive and achieve a 10% gain in size than it is to take something that is just starting out and achieve a 10% gain. We see that in everything in this world. So, insisting on looking only at a logarithmic scale is also insisting on ignoring the scientific realities of both economics and physics:

For example, a tiny company worth only $1oo,ooo can make a 10% rise in one year to become worth $110,000, and that is totally unremarkable by anyone’s standard. Sure, it’s nice that it is, at least, growing; but that would be considered a very small gain for a company that is only, say, five years old. Whoopie! It added ten grand! No one is going to be partying over that sales increase. Even the owner is probably going to be disappointed that he only managed to grow his company by $10,000. He is certainly not going to be thrilled. When something is that small, it’s not that unusual even to double the size of the company every year for several years.

Now imagine a large company worth $10 billion, and imagine that company increasing its size by 10% in one year. That’s a billion dollars, and EVERYONE recognizes that’s huge! Not just because it’s a billion dollars but because it’s extremely difficult to take a company that has been around for fifty years and increase it in size by 10% in a year. That’s making a solid growth target over which any company would break open the champagne. The same is true of emerging nations with small GDPs versus mature nations (economically) with huge GDPs. The little ones can see a 10% annual increase that would be impossible for the economically matured nations.

The reason for this is simple, and I talk about it a lot: diminishing returns start to overcome economies of scale. The bigger ANYTHING gets, the more energy it takes to create the same amount of growth that you could have easily attained when it was tiny. (A zygote grows much faster than an adolescent.) In terms of physics, that’s why an ant can carry seven times its own weight but an elephant can’t even carry its own weight. It gets harder and harder to keep adding weight-carrying capacity the larger you get. That doesn’t make the elephant less impressive than the ant. It’s just the law of diminishing returns in physics (similar to entropy).

So, a logarithmic comparison has its weaknesses as well. But now you have both, and you can see by either scale the Trump Rally compares favorably with its counterparts before previous massive stock market crashes. So, to say the market needs to go up more in order to qualify as a period of irrational exuberance is just blind denial of something right before your eyes.

Time to wake up people. You could get more irrational exuberance because irrationality cannot have a rational limit by definition (so, I’m not saying that cannot or will not happen); BUT you certainly don’t need to see any more to say we’ve seen as much as can be expected or has ever been seen before a major stock market crash. We’re basically right there or more than there, depending on which scale you use.



  1. Ping from Earl Adamy:

    I thank you for two very well written articles. I tracked the article covering the three crashes using my own historical data and found it both factual and educational. That of course led me to this one.

    I do want to address the issue of velocity mentioned in this article. I believe the 200% retracement of a prior decline is a critical measure because it works to set a target based on the slingshot effect from the previous decline.

    One of my chart sets uses the 200% retracements of the 1998 decline and the 2015-6 decline. It took 75 weeks from the 7/24/98 high through the 1998 low to the 200% retracement on 12/24/1999. It has taken 113 weeks from the 5/22/15 high to the 200% retracement on 7/14/17. Using just the low as a starting point to the 200% retracement it was 63 weeks for the 1999 rally and 74 weeks for the 2017 rally. These measures would suggest that the current rally is not quite as steep.

    I maintain 200% retracement targets on my monthly charts of the SPX. The 200% retracement of the 2007 Bear Market is 2485. The 200% retracement of the 2015 Correction is 2459. The 200% retracement of the 2000 through 2009 decline is 2439. I believe it is not a coincidence that the SPX has run into a buzz saw here. I believe that the market is now in a topping process; however that can not be proven until it actually rolls over.

    • Ping from Knave_Dave:

      I’m not familiar with the 200% retracement theory. I’m not sure why an upward retracement has to match 200% of a previous peak. (Not saying it isn’t so; just don’t know what that is based on or what evidence there is that things play out that way. it may be they do, but I’ve not noticed that.)

      The term “retracement” confuses me a bit because a retracement is a reversal in direction from the stock market’s general trend that does not change the overall trend. So, in 2015, the market was heading upward, the downward movement after 5/22/15 was a drop of about 14% so not enough to technically say the market reversed into a bear market. That, to me, would mean the downward movement was a retracement, and the upward movement after that was an eventual return to trend (although a very odd one is that it took YEARS to return to trend; hence, I always claim the market broke and the bull ended in 2015, though really I see the huge nosedive in late 2014 as the breaking point because the market barely did more than retrace its gains after that and then bounced along sideways for two years until the Trump Rally).

      I guess what you’re saying, though, is that, as of 7/14/17, the market climbed 200% higher than the amount that it lost from 5/22/15 to 8/28/15. If I look at the Dow, the market lost about 3,000 points after 5/22/15; and you’re saying it took until 7/14 of this year to gain that much above its prior record peak on 5/22/15. (200% above the point it plunged to or 100% above the peak from which it plunged; same thing.)

      Keep in mind that when I’m talking the Trump Rally, I’m not talking the the entire period of moving past its 5/22/15 peak. The market had recovered that peak by July of last year. Then it went back down until election day. So, the next move back up is the next rally, which I’m calling the Trump Rally since it was all about his election. That would be the runnup from the November low the Dow hit after last July’s recovery of its former peak. That’s an extremely steep rise, which ended in March of this year when the market started to retrace itself downward for two months. That was the end of that rally. It shout up in November of last year then went flat, then shot up some more and finally started going back down at the start of March.

      • Ping from Earl Adamy:

        There are two interesting aspects of retracements: 1) they can be calculated in two directions even though the dominant long term historical direction is up and 2) retracements greater than 100%, which is a full retracement, can be useful in gauging ranges of probable snap back once the opposing extreme (in this case the bottom) is reached. While nothing in the markets is 100% reliable (or we’d all be filthy stinking rich), the 200% and 262% retracements often mark extremes of price movements. Regretfully, I am unable to upload any of my charts which might aid in understanding.

        The so called “Trump Rally” actually began with a double bottom completed in February of 2016 long before the election. (I find media explanations of market happenings to be less than useful and not very accurate.) The SPX had already rallied a very sharp 20% in 6 months by the time the market’s attention shifted to the election. The 4% decline into Nov 4 was entirely reasonable given the size of the rally. The post Nov 4 rally was a continuation although the angle of ascent did steepen. That explains why I look at the entire rally in context rather than just a portion of it.

        None of my comments should detract from the central point which is that this market is in a blow-off phase which both of us appear to believe could very well lead to a decline which makes the last two look like child’s play.

  2. Ping from Rusty Brown in Canada:

    Interesting and valuable write-up, certainly, but I would really like to see a log-scale chart instead of the one shown. I think it would be more meaningful because of the long time-frame involved.

    • Ping from David Horace:

      Exactly. In fact a log scale is really required in this case. Using an arithmetic chart, it becomes axiomatic that the most recent climb will be the steepest one on the graph.
      All the best.

      • Ping from Knave_Dave:

        See update where I’ve included a logarithmic graph and the pros and cons about such an approach. It is not the final say, and it doesn’t make a huge difference anyway.

        • Ping from David Horace:

          Thank you, Dave, for your courteous reply and for the significant effort you put into the Update. Very well done.

          • Ping from Rusty Brown in Canada:

            Yes, my thoughts exactly. Thanks for your efforts and the extensive discussion of the pros and cons of the two types of chart.

  3. Ping from Don_in_Odessa:

    Update on my market expectations from my previous comments:

    On the monthly charts The DJIA, SPX, and NYA have reached four peaks and are currently still forming their fourth peaks since the January lows. A sign that a pull back is eminent. However the NASDAQ and NDX are still only on their third peak or Elliot 5th. It’s a near perfect Elliot 5th wave at that. Altogether, this could mean we are at the very top now. However, the Nasdaq and NDX have been rising on increasing monthly volume and relative strength. Which indicates to me, that if we do have a near term correction the NASDAQ and NDX may still go for that 4th peak. Which would probably be the blow off top I mentioned in my previous comments. More than a 20% correction and I would be wondering if the upside game is over for the foreseeable future. I am expecting a 10-15% correction now, lasting 2-3 months then an even greater exponential rise into who knows when to give the NASDAQ a chance to at least form it’s peak 4 if not more.

    • Ping from Knave_Dave:

      While I’m not big on peaks and wave theory, it’s interesting that the theories you ascribe to essentially match up with what I’m saying. So, I take them as generally confirming. Because I’m not looking to trade the final peak, I don’t worry about the exact timing, but I have been predicting the general timing for months now would be late June or July for things to clearly start ripping apart. (I think the worst will come in August or fall, but maybe not till the start of next year.)

      What I do see from trends and forces says the market is about to take a big leg down, right when I thought it would, and historically the first leg down is not usually the biggest. USUALLY, however, the market does not rebound to a higher peak when it is going into a major crash, but it does rebound and then fall even harder for the big historic crash, which would happen with the timing you suggest. However, it has during one crash returned to an ever so slightly higher peak before the relentless cascade down to the bottom. From what I see with major crashes, the downward forces are so great, they overcome the rebound that attempts to restore the bull market before it fully recovers the loss of the first drop. I’m staring an article on that now.

      There is one big caveat, though, to chart theories and to my looking at historic patterns as well as trending economic forces — something that has never existed in the past and that clearly distorts the way this bull market works compared to all others and, therefore, may distort the way it ends: Bots!

      Since the bulk of trading is now done by algorithms (or bots) that keep pushing the market up with every nudge they can manage to ratchet out of it, I’m not sure how the breakdown of that programming when reality overcomes programmed intent will happen.

      Sooner or later, nature finds a way. Sooner or later, reality (as in real economic fundamentals in this case) ALWAYS wins. The bots are programmed to work in (and create) a bull market. How far out of line with economic fundamentals can they push market prices before they break (become overwhelmed by the fundamentals they are shoving against), and will they accelerate the collapse in catastrophic ways when their rapid bidding tries to work going downhill, or do they have failsafes that will kick in and slow the ride down? If they are programmed with failsafes, will the failsafes simply fail as they often do (China Syndrome, Fukushima, Chernobyl) or do they just stupidly lack failsafes like BP’s Deep Horizon, wholly unprepared as BP was for the kind of accident that everyone has known for decades and warned could happen? (Due to greed an hubris.)


  4. Ping from Chris P:

    I know what you are saying is all true for sure. When we look at Japan we see that the Fed can buy most of the stock market. If we were going to predict the Japans; crash we would have done so 20 years ago. I guess my whole point is they will not let it come down until they are ready for it to come down.

    Good read! thanks Dave

    • Ping from Knave_Dave:

      I think you’re right about Japan. We would have predicted it was all over for Japan years ago, especially after the Fukushima earthquake and tsunami, and yet they keep on going. Because the Federal Reserve can print infinite amounts of money at will and because their currency has a vastly greater global market than Japan’s, the Fed could conceivably do the same thing in propping us along forever. So long as the money stays in financial markets, it avoids inflation in other parts of the economy as it just endlessly revolves in closed loops in the money pits of Wall St. and other money pits around the world. So, it only inflates asset prices, other than to the extent that the big boys and girls decide to buy something for themselves and dribble a little money into the broader economy.

      At the same time, we saw the law of diminishing returns kick in for the Fed as they had to increase the size and consistency of QE the longer it went on in order to get any general economic lift. Because the wealth effect was staying in the markets of easy money where people don’t have to create things and build factories to do it, there was very little economic stimulus to the rest of the economy. So, the downside of the low inflation is that we had the weakest recovery ever. It’s only been the longest (as they like to brag about) because it’s been the slowest. It’s length was not its strength but its weakness.

      We also have the robotraders bidding up every dip, programmed to do to the market what the Fed wants to see done — not so much, perhaps, because the Fed ordered the programming as just that the smart money knows to follow the Fed and not bet against it.

      On the other side of all that artificial resistance to a stock market crash or bond crash, we have an economy that is back to failing now that the Fed is removing stimulus, and it’s rate of failing appears to be increasing. That’s because the Trump Trade is wearing off as the likelihood is that his plans continue to be thwarted and that the Russia thing (lacking evidence as it so far continues to do) will continue to devour his presidency (as it is designed to do).

      Back to the up side, we also have the appearance that the Fed and the financial establishment have increasingly taken Trump under their sway. They claim they would love to see fiscal stimulus because they know their powder is all wet. That would give reason to think congress might get in line. Trump at one time, wanted to douse Yellen and find someone new, but now he doesn’t. So, not knowing what side of the Fed Trump is on makes it hard to know whether fiscal stimulus will happen; but all signs are that it is bogged down and staying bogged down.

      The Fed has an historic habit of removing stimulus just as their recoveries are wearing, and they are once again doing that. (That, or their recoveries always weaken when they remove the artificial stimulus because their recoveries were never built on much else anyway.) At any rate, I think it has been ten times out of thirteen, that the Fed kept raising interest rates right up to the day when their recovery failed (and often the stock market crashed). So, they don’t have a good record of knowing when to stop raising rates in order to get their recoveries to lock in. This being the weakest economic recovery ever and already sinking, it is most likely to crash earlier and lower in the interest-raising game.

      Then there is the whole conspiratorial possibility that the Fed wants the global economy to crash hard so they can persuade the people’s of the world to go with a dramatic shift away from real currency to electronic currency. Something the government would like because it makes it easier to monitor economic action and to regulate economic activity and tax it, and something the Fed likes because it gives them much more ability to regulate economic activity, too.

      Signs are that it is all going down. Even though the Fed has gained influence over Trump through the GS boys in his administration, i don’t think they like him. He’s a loose cannon who operates outside the Fed canon — the rules of engagement with the globalist economy. So, if they ever wanted to let things fall apart, now would be the time. They have a habit of crashing their recoveries anyway … almost at a level of consistency you can bank on.


  5. Ping from GonzoTheBurner:

    This is a good read Dave. I notice you are writing more frequently as of late, and others are sounding the warning bells too, but it seems fewer people are listening. I tried telling my dad about this, but he doesn’t want to talk about it, says its too much. If just thinking about it is “too much” what are these people going to do when they are broke, hungry and homeless? Being able to say “I told you so” gets old after a while, doesn’t it? We’ll see…

    • Ping from Knave_Dave:

      Definitely fewer people are listening when they do read (and many fewer are reading). Even with this article, I was just writing with someone on ZH, who said, “But the rally could keep on going.” Well, sure it could; but it doesn’t NEED to. It’s fully baked in already. It’s as euphoric as anything we’ve seen. Could euphoria get even crazier and go up for yet a third leg before the market starts to seriously go down? Yes. It never has in past crashes, but it COULD. After all, by definition, irrationality has no rational limit. So, who knows whether a whole new round of feeding frenzy could take place before the market starts its long journey south?

      The Republicans could suddenly get it all together and unite solidly behind Trump, and people might, then, get all euphoric that this means his legislation is going to pass. Or the FBI could suddenly declare that Trump is a 100% innocent. But I don’t see those things as being very likely (even if Trump is 100% innocent). I see a lot of churning through the summer being most likely.

      Still, it could make another three-month run up. Is it a ride I want to take on the stock roller coaster? Not me. Some do.

      I also expect to get a lot of comments when it doesn’t all crash at once and when the first plunge isn’t that big that I was wrong about summer … even though I’ve written a number of times on this site that major crashes are major events, not singular plunges. They are train wrecks that take YEARS to play out. Both of the last two big ones took two full years and a few bonus months to fully play out, and they were made of several plunges, and the first drop was never the worst drop in any crash. Not even in the Great Depression.

      But what happens is the top breaks off flat after one of the most euphoric rises in history (as we’ve just had happen), then it starts taking big bounces downward. Sometimes it recovers a little higher than it was before, but then takes a major slam and doesn’t recover from that high for years.

      USUALLY, the ice starts breaking up in the summer, cracks show and things get pretty broken looking. USUALLY, there is a big drop in the summer as well, but not necessarily the worst drop. USUALLY the first drop is NOT the worst. OFTEN, the worst drop comes in October. (Take the last crash as an example. There was a big drop in summer when Bear-Sterns broke; but the biggest plunge happened during the time when Lehman Bros was going down in the fall.)

      I’m thinking I may need to do a follow-up article that dissects each of the historic major crashes to show there is no clear simple pattern where it just breaks off the top in the summer and slides down the cliff, and that’s the worst of it. It’s hard to turn a bull’s head. He fights back, but the fight is now on.

  6. Ping from Don_in_Odessa:

    Well Dave you are right. The rate of increase out paces all three periods you recognize as irrational exuberance. I did the math:
    11/98-007/99 54% increase in 8 months = 6,75%/month
    6/06-10/07 28% increase in 16 months = 1.75%/month
    02/17-06/17 35% increase in 4 months = 8.75%/month, that pencils out to 105% implied growth of corporate profits in 12 months. LOL! A correction our way cometh for sure.

    Personally my definition of irrational exuberance is any rise in the markets that out paces the growth of corporate profits. By that measure the market is chock full of irrational exuberances to both the up side and the down side. I never mistake the market to be rational. It never is. But what makes this whole subject worth pursuing to me is tradable bets at various kinds of extremes, one of which you have clearly identified in this article is what makes profiting and beating the market possible for the experienced trader. Not so much for the buy and hold mentality of the average investor though. From the high in 2000, it took thirteen years to break even for the buy and holders. Not a good bet indeed.

    Thanks for a very good article. Not to be totally in agreement though, my work tells me we still have a correction and one more push to the upside to new highs before the onset of sky tickling ground begins. And if my expected correction is more than 20%, then starts to recover, we may have a long wait before sky lands on ground. But I am covering my bets with options on the other side just in case the sky is falling crowd is right. BTW, the sky has been falling since I woke up back in the 70s. I imagine it has been falling by some folks reckoning long before that. That’s why I still play the game … with insurance.

    • Ping from Knave_Dave:

      Finally looks like you were right about there being one more push, though generally we are thinking on the same track.

      • Ping from Don_in_Odessa:

        Looking like the Banksters won’t be happy until they’ve sucked the cab drivers back into the markets hey?

        It’s one day at a time for the time being. Current target $2507-31 on the S&P. Got greedy for a quickie correction the other day and went short, way too early it looks like. Got a correction but it wasn’t enough to move my options enough to even break even. Watching the 7/27 high and potential of divergent relative strength for clues. OOPS!

      • Ping from Don_in_Odessa:

        Almost to the target I mentioned a month ago. I would expect the Russell to make a convincing attempt at a new high before a correction. If the Transports don’t confirm the move … well … OOPS! Then again this market is breaking rules right and left. Got my finger on the short button; although, I may miss the signal. Looking more and more like some external event is going to be the catalyst for the next real serious correction.

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