Our research and studies strongly suggest the triple-header in place since tech stocks began their insane run in 1999, far exceeds any prior madness, including Tulipmania, the South Sea Bubble, the Nifty-Fifty “one decision” stocks of 1972, and even the lunacy of the Roaring Twenties, cautions Alan Newman, editor of CrossCurrents.

As illustrated in the chart below, total margin debt vs. Gross Domestic Product (GDP) is now at 3.27%, second only to the Roaring Twenties madness when ten-percent down was all you needed to play the game.

chart 1

Valuations, as measure by Shiller’s Cyclically Adjusted Price/Earnings Ratio (CAPE) recently soared to the second highest ever, exceeded only by the tech insanity.

Ironically, the public no longer plays anywhere near the role played in the formation of the two previous manias, as portfolios were sliced neatly in half by the two bear markets that ensued.

Nevertheless, mechanized and algorithmic trading has taken total Dollar Trading Volume (DTV) higher and higher. Below, at the pace established in the first five months of the year, DTV could hit $87.8 trillion, 88% higher than 2007 and 169% higher than in 2000.

chart 2

Given relative sideways movement since 2010, the expansion thus far in 2018 looks suspiciously akin to spikes in 2000 and 2007.

Worst of all, leverage in the form of margin has run our net liquidity measure far below where the four previous price peaks occurred. It would seem all the pieces are in place for a replay. Manias never end well.

chart 3

We looked for signs of a bottom, we swear we did. We found none. Two months and 12.3% down might be a decent correction in normal times but these are not normal times. We are at the tail end of a veritable mania for stocks and a bull market that stretched out close to nine years.

Almost without fail, the best sign of any significant bottom is when they throw out the baby with the bath water, when sell at any price becomes a legitimate strategy, when fear is through the roof, when no one is bullish, when values are outstanding, and when volatility is so out of whack you can’t stand to look at the monitor for more than ten seconds. Virtually none of those circumstances apply today.

iI there were any chance whatsoever that the April 2nd low print of Dow 23,344 would have marked the end of the correction, we should have seen evidence in the most speculative stocks, those traded on Nasdaq.

Instead, we witnessed a fantastically quick reaction that lasted only ten trading sessions (Nasdaq and the S&P 500 bottomed on February 9th), and not one day of capitulation. Bottoms are born from fear. Instead, what you see is a period of 259 trading sessions without one single day of 1:9 up/down volume, traditionally accepted as the definition of capitulation.

There are roughly 252 trading sessions in one year, so it has been over a year since we last saw such an occurrence (May 17, 2017). While capitulation days are extraordinary, they are not all that rare. An average year suffers 6.7 capitulation days each year. The current picture displays far too much complacency. As it is, it appears a lot more work must be done to put in a bottom, thus we are looking at more downside in both price and time.

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