Two years scare the living daylights out of professional traders: 1987 and 1999. They frighten the old pros because those were the two years linked with two thing: a rapid fire lead up and then ignominious crashes.
That's why it's worth pointing out as we turn the page to May that the Dow hasn't been as strong from the beginning of the year until now since 1987, and you have to go back to 1999 to find a year that started better than 2019 for the Nasdaq.
In other words there couldn't be two worst analogues to what we have going on this year than those two data points. So, should we be worried? Should we be selling right now especially given that the economy appears to be slowing, the president is attacking the Fed in a tweet storm and perhaps we should fear a return to the tightening cycle if we get a strong employment report on Friday?
I think I have a unique perspective having traded in both periods and, perhaps more important, having been in cash for the 87 crash and having been short for the debacle that was 2000, the denouement of the insane 1999 lead up. I remember them so well because I have played them over and over in my mind because I am always worried that history could repeat itself.
So my first takeaway represents good discipline; any time you have runs like we had those two years it doesn't hurt to take something off the table because bulls make money, bears make money and hogs get slaughtered.
That's why, even though we don't see selling tsunamis coming, we have peeled back for my charitable trust which you can follow along by joining Action Alerts PLUS. Let me be clear: we do not expect reprises of the crash of 87 and the 1999 unwind. Any time you get these kinds of runs, strictly as discipline, you should be ringing the register because it is prudent and prudence is a necessary quality when you are managing money.
But why am I not recommending selling everything as we did in 1987 or actually shorting the Nasdaq as we did in 2000.
Simple: because other than the similarity of the velocity they have very little in common.
Let's start with 1987. Against a backdrop of a 9% 10 year Treasury the Dow Jones and the S&P 500 rallied relentlessly. It was a nauseating run with the big industrials leading the charge, deserving, given the strength of the economy.
Still that doesn't explain how these indices marched ever higher until they traded at 29 times earnings, the most expensive I have ever seen for the so-called blue chips.
What was really going on? As someone who doesn't like to sleep - even to this day - I know why it happened. At the time the United States was allegedly sunsetting and the Japanese were in ascendance. Every morning, at the opening, like clockwork, Japanese buyers would come in and literally take stocks up, virtually lifting them to new levels.
It was absurd and we all knew it. Everyone who traded for a living would have accepted that our market was just a plaything for Tokyo and the Japanese seem to have no valuation parameters for their purchasing whatsoever.
The rally got to be so noisome that some sharp consultants offered insurance against, called dynamic hedging, which used futures to stop out major firms if the stock market were to rollover. Sure enough come October the relentless buying ran out and the huge competition from bonds overwhelmed those who were still long and, yes, wrong. We had a proximate cause, Treasury Secretary James Baker telling the Germans that they were abusing us with their exports and so we were going to lower the value of the dollar. In truth, though we were ripe for a fall.
Once we started rolling over the portfolio insurance kicked in and the Chicago futures overwhelmed the New York stocks and the market was more than cut in half in a matter of days.
The circumstances are so different now: much lower interest rates so little competition for your dollars, a price to earnings ratio of 19, instead of 29 and no ridiculous buying from a country far more powerful financially than we are, or so we thought. The only real similarity? The speed with which we have gone up. I would say not enough to warrant a true parallel.
How about 1999? The great Nasdaq bubble made a ton of sense at the time because it was all about the internet, specifically companies that exploited the internet in some way shape or form. Cisco (CSCO) , Intel (INTC) and Microsoft (MSFT) were at the forefront as the former was the backbone of the internet and the latter two were how you on-boarded. But the real drivers of that rally were companies long since gone: telco related companies that served as internet pipes and companies that created other companies - so-called labs - that incubated entities that exploited the internet. The former reached valuations ranging from 80 to 40 times. The latter had no worth at all. Most of the top producers of the overvalued ramp don't exist because they were pretty chimerical to begin with.
That's not the case now. Sure we have the FAAN stocks - noticed I dropped the G because Google, now Alphabet (GOOGL) , is decelerating in growth rather rapidly and given that I coined the term FANG I can with the stroke of a pain eliminate the G oat, but Apple (AAPL) at 16 times earnings, after crossing the trillion dollar barrier today sells at 16 times earnings. Amazon (AMZN) and Netflix (NFLX) have been historically overvalued on a price to earnings ratio but are relatively the cheapest they have been versus their own personal valuations. Facebook's (FB) multiple has relentlessly shrunk to where it is 24 times earnings. The other big Nasdaq names aren't outrageous like 1999 even if you think that a Microsoft or a Cisco are elevated, My view involves a degree of subjectivity and I am by nature of the medium truncating the analysis. And I am taking to heart today's Fed decision to do nothing with rates, the status quo for the moment.
Now, though, I am not going to exonerate the NAZZ. We have a deluge of equity offerings, something that reminds me of all of the offerings in 1999 and that's disconcerting. Hardly a day goes by when some company, that's been kicking around for ages, comes to market and this level of supply is unnerving to anyone who recalls how IPOs were churned out equally as relentlessly as they are now. There are simply too many companies coming public for me not to sound the klaxon and, for the record, next week's Uber deal is perhaps the most likely proximate cause for a selloff if the deal breaks down a la Facebook which precipitated a correction when it aborted in spectacular fashion.
I wish I could be more dogmatic in my desire for you to take profits based on my historical recollections and reflections. However, using either of those two run-ups to absurd levels as a reason to dump stocks now lacks critical reasoning and rational analysis.
So, watch the IPOs; they could cause a breakdown as there isn't enough money around to handle all the merchandise that is coming without some sort of a breakdown. But as for similarities? They may have like velocities. However that's about as far you can go to reach rationality.
(Cisco, Microsoft, Alphabet, Apple, Amazon and Facebook are holdings in Jim Cramer's Action Alerts PLUS member club. Want to be alerted before Jim Cramer buys or sells CSCO, MSFT, GOOGL, AAPL, AMZN, or FB? Learn more now.)