Manias, Past And Present

Stare at the chart below, history is being made:

A rational buy-and-hold investment strategy, cultivated by persistent increases over several decades, has come to a frightening  moment in the U. S. stock market. The Dow Jones Industrial Average has soared over ten thousand points in twenty two months, a near seventy percent increase without so much as a two percent correction, on top of a tripling in price off the lows in 2009.

This is a mania phase, where the unconscious herding impulse, always at work in uncertainty, morphs into the mindless conviction that the risk is not in owning stocks, the risk is not owning them (think about that for a minute). The great irony in bull markets is that they sometimes end in a huge spike, driven emotionally by the fear of missing the boat. Anyone who owns stocks today, while possibly somewhat concerned about the fast rise, is unwittingly possessed of this fear that, if they cash in, the market is sure to run off and leave them. This is how it ends.

When it’s over, the market crashes violently. Always. It should terrify anyone who owns stocks today. Unfortunately, if they start to fear a crash, their main concern is, can the market go higher before it crashes? Yes, of course it can, and probably will.

But when it crashes, the return to and past the 200 day moving average will happen in a few days or weeks. They will wake up with half of the value of their portfolio gone. They will scurry to their advisor, the one who has them fully invested, for advice. The advisor will say, “Don’t panic, stay the course, stick to your plan.”

But they will panic. They will agonize and hang on until the day when their holdings are down seventy percent. They will decide they can’t take anymore. They will call their advisor’s office during the lunch hour and instruct the advisor’s assistant to liquidate the account because now, the fear of missing the boat has been replaced by the fear of losing what is left.

This market top is of one degree higher in trend than the top in 1929. The next few years will be more difficult than the 30s. I’ve written about this in earlier posts and the market continued to climb. The case is very compelling for my view that a Grand Supercycle bear market will soon get underway and, after the initial crash, stage a countertrend rally for a bit, and then tail off in a poor, poor market that will last for a number of years.

In a panic, the first to panic wins.




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