This Never Happens

You know what never happens? This never happens:

Exponential acceleration in the direction of a trend is never followed by stabilization at a new plateau. It does not matter if the chart represents Gold futures, or house prices, or population levels: extreme moves are followed by collapses, not by plateaus.

The difficulty, of course, lies in picking the top. The graves are filled with the ruined balance sheets of those who tried to pick the top too early.

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  1. Pull up a lifetime chart of WMT and tell me what you see having happened on that one in the dot com boom and aftermath. Never say never! :-). The point is generally good though, and even WMT did show a temporary significant drop below highs after 2000. A number of high quality large cap stocks show a similar pattern as they have digested their boom-era appraised value over the last ten to fourteen years by continuing to steadily increase earnings.

    • Fair, I left myself open for that one. As my old teacher used to say, “Never generalize about anything.”

    • Growth (decay) is an exponential. Perhaps the caveat is when gov’t forces usurp market forces. E.g., Walmart v. labor unions, USA v. Microsoft, Google v. EU.

      As a blogger once put it, our market is starting to look Chinese. He was referencing the bizarre appearance of China’s “markets” (charts).

  1. Thursday links: exponential patterns - Abnormal Returns | Abnormal Returns

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