What Goes Up Also Comes Down: The Heavy Hand of Bubble Symmetry
The comments below are an edited and abridged synopsis of an article by Charles Hugh Smith
Should bubble symmetry play out in the S&P 500, anticipate a steep 45% drop to pre-bubble levels, followed by another leg down as the speculative frenzy is slowly extinguished.
Bubble symmetry is interesting. The dot-com stock market bubble circa 1995-2003 offers a classic example of bubble symmetry. The key feature: The entire bubble retraces in roughly the same timeframe as it took to soar to absurd heights.
Bubbles pop because they are based in human emotions. We attempt to rationalize them by invoking the real world, but the reality is that speculative manias are manifestations of human emotions and the feedback of running in a herd of social animals.
With this in mind, consider the current bubbles in stocks and housing. Should bubble symmetry play out in the S&P 500, we can anticipate a steep 45% drop to pre-bubble levels, followed by another leg down as the speculative frenzy is slowly extinguished.
Housing is notoriously sticky when it comes to price declines, as sellers are tenacious in the denial phase. Those buying on the first modest decline spur the hopes of sellers that the flood of mania-driven buyers is about to resume, but manias don’t last nor do they resume.
If bubble symmetry plays out, we can anticipate a relatively steep drop of about 30% to pre-mania levels, followed by a longer decline to pre-Bubble #1 and Bubble #2 levels, a roughly 60% drop from bubble heights.
There are always endless reasons why bubbles can’t possibly pop and why 60% declines are impossible, even as history tells us that 60% declines are inevitable, and in the bigger picture, rather modest. It’s the 90% declines that really hurt.