The Shkreli Top? History Could Be Repeating Itself
Since 1998, there have been several so-called tops in the market. Each one has been characterized by a specific event, sector or sometimes linked to an individual issue; For the sake of this article, an individual person.
In 1998, the unwinding of Long-Term Capital Management's portfolio sent shockwaves across Wall Street. Although the market had a few tough months absorbing those positions, it regained its footing and ended the year substantially off the lows and at record highs.
On March 10, 2000, the dot.com bubble finally burst. The end of the Internet boom, which applied an excessively high valuation to many companies with a .com address, sent the market spiraling south.
The tragedy of September 11, 2001, accelerated the decline and the market was unable to find a bottom until June 2002. From there, the market embarked on a monster rally that was not derailed until late 2007 and into 2008, as the Financial Crisis rocked the indexes and far surpassed the mid-2002 lows.
Once again, with the aid of quantitative easing the market staged an impressive rally that had the Dow Jones Industrial Average nearly doubled from its March 2009 low (6,470) to 12,000 by the end of July 2011.
At that time, fears over the further expansion of the European sovereign debt crisis shaved a 1,500 points off the index, but it was back at near highs by year-end. Concerns over the tepid growth of the U.S. economy along the United States credit rating being downgraded were also contributing factors to the decline.
In the fall of 2014, the combination of the Ebola crisis and the speculative excess surrounding the Alibaba Group Holding Ltd (NYSE: BABA) IPO had naysayers predicting doom and gloom once again. The outcome? A quick spike down in the markets and and even quicker recovery to new all-time highs by year-end.
Back To The Future
Now that the blow-up of a large hedge fund, the dot.com bubble, the financial crisis and fear of European economy collapsing, what will the next decline be dubbed and blamed on?
Let me be the first to coin the 2015 version of the aforementioned events, "The Shkreli Top." Can there be a more egregious example of rampant and speculative excess than the recent rise and fall of KaloBios Pharmaceuticals Inc (NASDAQ: KBIO)?
When a company (which itself declared it was in the liquidation process) rallies from $2 to nearly $46 in just three trading sessions, surely some kind of top has made. Especially when the company has consistently lost money, has no reported revenues and only the promise of miracle drug or cure to boot.
It is impossible to correlate the collapse of KaloBios with the entire market, but it should at least serve as warning to investors. Upon the arrest of CEO Martin Shkreli, the issue collapsed to the $11 level and has been halted since last Thursday. If it ever re-opens, it may be heading back to the $2 level or lower.
It cannot be ignored that the recent escapades of Mr. Shkreli coincide with the first interest rate hike since 2006. For many market pundits, the primary reason for the recent bull market has been an accommodating Fed policy that has pumped billions and billions into the economy at extremely low rates.
Now that stimulus has been removed and the process has reversed, will the economy be able to continue to expand? Apparently, our data-dependent Fed will closely monitoring the situation. Perhaps last week's decision was based on positive data not yet available to the public.
At this time, the market has reacted very negatively to the hike in interest rates (traditionally a bad sign for equities) and has been in full retreat since last Thursday. Whether the market has put in the "Shkreli Top" or "Fed Top" or is simply experiencing a volatile triple witch expiration and digesting the rate hike and future rate hikes, will be determined in the forthcoming volatile trading sessions in the not-so-distant future.
Joel Elconin is the co-host of Benzinga's #PreMarket Prep, a daily trading idea radio show.
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