Testing the stability of the 2000 US stock market “antibubble”

Abstract

Since August 2000, the stock market in the USA as well as most other western markets have depreciated almost in synchrony according to complex patterns of drops and local rebounds. In (Quantitative Finance 2 (2002) 468), we have proposed to describe this phenomenon using the concept of a log-periodic power law antibubble, characterizing behavioral herding between investors leading to a competition between positive and negative feedbacks in the pricing process. A monthly prediction for the future evolution of the US S&P 500 index has been issued, monitored and updated in ( http://www.ess.ucla.edu/faculty/sornette/prediction/index.asp#prediction), which is still running as the article goes to press. Here, we test the possible existence of a regime switching in the US S&P 500 antibubble. First, we find some evidence that the antibubble has exhibited a transition in log-periodicity described by a so-called second-order log-periodicity. Second, we develop a battery of tests to detect a possible end of the antibubble of the first order which suggest that the antibubble was alive in August 2003 but has ended in the USA, when expressed in the local US dollar currency. Our tests provide quantitative measures to diagnose the end of an antibubble. Such diagnostic is not instantaneous and requires from three to six months within the new regime before assessing its existence with confidence. From the perspective of foreign investors in their currencies (S&P 500 denominated in British pound or in euro) or when expressed in gold so as to correct for an arguably artificial US$ valuation associated with the Federal Reserve interest rate and monetary policy, we find that the S&P 500 antibubble is still alive and running its course. Similar analyses performed on the major European stock markets (CAC 40 of France, DAX of Germany, and FTSE 100 of United Kingdom) show that the antibubble is also present and continuing there.