The following is the pattern of price appreciation and decline for Lam Research (LRCX) from 1990 to 2017 with the application of Speed Resistance Lines [SRL].
1990 to 1998
In the period from 1990 to 1995, Lam Research (LRCX) increased more than +3,470%. From the peak of 1995, LRCX declined by –87.70% by 1998. Based on the peak at $23.92, all of the Speed Resistance Lines [SRL] achieved their downside targets.
In addition, we’ve included the scenario for if the peak in the price were to have been the $13.13 level. We included this because much of the analysis is based on parabolic moves to the upside. Because we couldn’t possibly know where the peak in the price would be in real-time, we attempt to take the view, “what would happen if we were wrong about the peak?” Amazingly, even if we had chosen the $13.13 peak and used the downside targets based on the SRLs, we would have seen all of them achieved and would have been otherwise pleased if only the conservative target was met.
1998 to 2003
In the above chart, from 1998 to 2000, LRCX increased +1,789%. in the following decline, LRCX fell as much as –87.90%.
There weren’t many “fake peaks” to initiate “what if” scenarios. However, let’s assume that along the way up we had run the SRL and tried to project downside targets. Any price above $14.00 would have generated a conservative downside target that the price action later achieved. Also note that the period when LRCX rose from $2.94 to $12.79 and then fell to $9.04 would have generated a conservative downside target of $9.72. This would have easily achieved the downside target.
2002 to 2008
In the period from 2002 to 2007, LRCX increased +777.67% and later declined as much as –74.56%.
Not much can be said other than all downside target being achieved of the course of a six year period. Again, in an attempt to prove our calculations wrong, we ran the $35.40 peak to see if the $19.80 number would have been an expected downside target. In the short term, the conservative downside target and mid range targets would have been accomplished. In the long term, from the $35.40 level to the $15.00 in 2008, the low in 2008 would have met the SRL parameters for downside targets being achieved.
2008 to 2017
Since the beginning of the bull market in 2009, Synopsys Inc. (SNPS) is a stock that has perform in line with the Nasdaq Composite Index until early 2016. Since February 2016, SNPS has accelerated well outside of the historical trend for the stock. While there are many fundamental reasons for excessive gains in the last two years, the gains are still excessive and therefore should, at minimum, revert to the mean.
The challenge with reversion to the mean is that the stock price will likely overshoot on the downside. With this in mind we have provided the Speed Resistance Lines indicating the conservative, mid range, and extreme price targets below.
Equifax is on a tear, to the downside. Let’s see what happened to the stock in the last decline from an all-time high and see if there is any precedence for what we can expect going forward.
In the period from 2002 to 2009, the price of Equifax (EFX) increased +158% to a high of $41.22. the decline that followed brought the stock to $17.80.
Equifax fell to the conservative downside target ($34.18) and the mid range downside target ($23.96). At the time, Equifax had an extreme downside target of ($13.74) but somehow didn’t manage to decline to that level, in spite of the fact that the housing crisis was co-opted by credit bureaus changing their standards which materially affected FICO scores.
“…the higher the credit score, the larger the increase in serious delinquency rates between 2005, 2006 and 2007. For example, for borrowers with the lowest credit scores (FICO scores between 500 and 600), the serious delinquency rate in 2007 was twice as large as in 2005—an increase of nearly 100 percent over the two years. For borrowers with the highest credit scores (FICO scores above 700), the serious delinquency rate in 2007 was almost four times as large as in 2005—an increase of nearly 300 percent. In addition, the serious delinquency rate in 2007 for the best-FICO group was almost the same as the rate in 2005 for the worst-FICO group.(Demyanyk, Yuliya. ‘Did Credit Scores Predict the Subprime Crisis?’ . Federal Reserve Bank of St. Louis. October 2008. link.).”
Bending of rules towards what was considered a prime rated credit score contributed significantly to lenders justifying the approval of home loans which later failed. With all this in mind, Equifax and their competitors should have fallen much more than they did. In fact, under normal conditions, at least one of the leading credit bureaus should have gone out of business.
Now, Equifax has declined based on a recent hack of their data systems. The resultant decline in the stock price seems natural. However, given the resilience of the stock price after the housing crisis, we have to default to the view that the company won’t go out of business but will be severely impacted in the short-term.
The following is the pattern of price appreciation and decline for Activision Blizzard (ATVI) from 1993 to 2017 with the application of Speed Resistance Lines [SRL].
1993 to 1996
In the period from 1993 to 1996, we can see that Activision Blizzard (ATVI) increase from $0.27 to as high as $1.50 or a gain of +455%. The decline that followed saw ATVI fall –58%, achieving the conservative downside target of $0.80 and the mid range downside target of $0.65. Although the chart doesn’t show it, ATVI did not rises above the 1995 level and subsequently fell as low as $0.43 by 2000 and ultimately achieving the extreme downside target of $0.50 in the process.
1999 to 2003
In the period from 1999 to 2003, ATVI rose from $0.43 to as high as $3.96, a gain of +821%. The resulting decline saw ATVI drop –63%. In the chart above we do note a possible scenario that the SRL is run on the stock at the $3.12 peak, assuming you don’t know where the ultimate peak would be. In such an instance, a conservative downside target of $1.83 and a mid range target of $1.44 were calculated.
In the big scheme of things, the conservative downside target was achieved and the mid range target was one penny short of the mark in 2002. The point of this exercise is to see, what would have been the outcome if there was an error in the timing of the calculation of the downside targets. As we shall see, these situations are all too real with outcomes that are generally surprising. However, in the immediate decline after the $3.12 price peak, the conservative downside target of $1.83 was $0.02 cents short of the $1.85 low set in September 2001.
2002 to 2009
In the period from 2002 to 2009, ATVI increased in price by +1,084%. The decline that followed brought the stock down as much as –56% before a recovery ensued. Again, we have marked off the points where an error of early use of the SRL could have been applied. In each of the three examples, the conservative downside target was achieved. Suffice to say, in the case of the SRL and price peaks, the conservative downside target is a reasonable point of reference for consideration of ATVI.
2012 to 2017
The price action of ATVI has seen the stock price increase from a 2012 low of $10.08 to the 2017 high of $66.16. The gain in the stock price has been +556%. Our SRL has the following downside targets:
Bitcoin is going through the customary pullback in the price. The new threshold to watch for is –35.77% on the downside. This was the amount of loss that speculators and investors were willing to accept from the June 11, 2017 high of $3,018.55 to the July 16, 2017 low of $1,938.94 before a new bull run to the upside ensued. Most traditionalist say that a bear market starts at or near a decline of –20% or more. At which point, it takes some time before the “investment” gets back to the previous high (example: Nasdaq Composite took 15 years to get back to the 2000 high).
In this case, we’re not talking about a stodgy technology stock index, we’re talking about a potentially new currency mechanism which will likely supplant many existing currencies. Bitcoin is only one among many competing to be the final choice of a new money. However, in order to get that prize, Bitcoin will need to survive the high risk phase of speculative boom and bust.
Right now, we’re watching Bitcoin investors test their tolerance for pain as the price swoons from the high of $4,950.72, as report by Coindesk.com, to the current level of $3,390. As we said in our August 21, 2017 posting:
“…participants will accept even larger declines if the expectation is that it will exceed the prior peak. So far, Bitcoin participants accepted a –14.94% decline followed by a –35.76%. In each instance, these declines were followed by new highs in the price of Bitcoin. By our rationale, Bitcoin will now fall as much as –35% and possibly more as participants become inured to the pain of loss in anticipation of new highs.”