Optimists like to point to the monthly chart of the S&P 500 as showing a completed three wave correction from the high of 2000 to the low of 2002, then to the rally high of 2007, and then to the bottom in early 2009, concluding that the rally over the past 6 years from that 2009 bottom is the beginning of a brand new upleg that should last at least another 10 years.
However, when you look at a monthly chart of the NASDAQ 100, below, you will see a very different and worrying picture.
The top in 2000 produced a nice 5 wave impulse into the bottom of 2002, and from that point forward you see a very clear 3 wave corrective rally of 13 years duration though today as the NDX attempts a retest the high of year 2000 at 4816. The NDX monthly high of 2239.23 in 2007 failed to retrace even 38.2 % of the prior decline.
I would suggest that the NDX (Nasdaq 100) is the best measure of market sentiment, containing as it does the large cap tech and cocktail stock favorites.
Zero percent short term interest rates have driven the cell phone boom from 2009 through 2013, while from 2013 through the present low rates have provoked a boom in social media stocks. Ultimately the social media stocks are driven by advertising revenue. And now we hear that Facebook users are posting less content, and that one billion of its 1.5 billion users never click on an ad.
The direct internet sellers, including the most prominent survivor of the dot com craze, Amazon, and others such as Ebay, and more specialized internet sellers such as Best Buy, Midway (for guns and hunting) and others do plenty of advertising. But it is direct advertising of goods they are selling, Those goods are found by search engines to which these sellers pay for position in the search results. Advertising in the form web site maintenance and search engine position payments is a substitute for the expense of bricks and mortar locations including salary expense. It is durable ad revenue as the customer finds what he or she wants with a maximum of convenience and a minimum of wasted time.
Social media, including especially Facebook, is trying to do something very different.
They are hoping to stimulate demand by having a member click on an add and then tell their friends about their experience, thereby generating demand where it did not previously exist. It is an attempt to gin up demand through social pressure. Thus, social media advertising is highly leveraged in several ways, some of them unexpected and yet to be experienced. In the rare case that a social media advertised good or service is truly useful and desirable, likes from friends can create and spread demand like wildfire. But if the new good or service is only mediocre or competes head to head with well known and liked goods sold through search engines, then being advertised on social media is not terribly useful and the ad spend can be a total flop.
But more significant is the fact that social media advertising and its hoped for multiplier effects are entirely at the mercy of social mood. Should the social mood darken and should a big “stop spending” move become the hip and cool thing, social media ad revenue would crater. Back in the winter of 1979-80 during the Carter administration, G. William Miller, then Secretary of the Treasury, went on the nightly news and, in an effort to curb raging inflation, urged everyone to lock up their credit cards and stop spending. Retail sales collapsed 9% within two months and a publicity campaign was orchestrated to get those credit cards back out of lockup. Social media would be the perfect medium for some of the armchair revolutionaries on ZH to make “buying shit you don't need” un-cool and paying off credit card debt way cool. It would only take 25% of Americans locking up their credit cards to crash the system and destroy most of the oligarchs, all the while improving their circumstances and avoiding the unpleasantness of failed armed revolution.
Of course any such social mood and attendant campaign would vaporize social media ad revenue and ultimately, the social media stocks themselves. Of course the more immediate threat to the social media stocks is the fact that so much of their ad revenue comes from VC funded social media startups desperate to gain traction.
We may be a ways away from a profound swing in social mood, but then the anger of the vanishing middle class suddenly visible in this Presidential primary season is an early warning of what is to come. The monthly chart of the NDX from 1997 gives clear warning that a retest of the 2002 bottom is a reasonable possibility.