.. how and why the bull run is about to end
JoBar : .. how and why the bull run is about to end
"If stupidity got us into this mess, then why can't it get us out?"
- Will Rogers
Bear market rallies are wondrous to behold. They start with a few insiders buying their own stock and catching the shorts out. The shorts close their positions and buy back the shares, propelling the price upwards. The market jumps. It does not walk or stride but jumps upwards, leaving gaping holes between the close of one day and the open of the next. The old hands are soon on board, being selective at first and taking profits as the market moves higher. Their profit-taking can be seen as the market "correcting" before the hop, skip and jump upwards. As the market progresses higher, it brings forth optimism in those who are invested and hope in those who are about to get on board.
Now the more volatile stocks take the lead. Still large, still liquid, they power ahead. Optimism increases, confidence is restored. Soon rotation between sectors gives way to a broad advance on all fronts as indiscriminate buying takes over. This indicates that the youngsters are on board, flinging other people's money in every direction. Extreme levels of optimism prevail.
By now the market rally is hyped up by the media. Soon the old mantra starts to spread. Stocks are going up. Recovery is on the way. Better times are ahead. When fear is absent and most analysts are bullish, you know that the market advance is about to wane.
The institutional managers who were left behind now have to show that they were holding the stocks that have led the rally. They start buying. The main market starts to consolidate in a ponderous way.
Once the least liquid and least profitable stocks take the lead and start to be publicized as sources for double digit returns, you know that the party is over and that the kamikaze brigade has returned to the fray. Insiders start to sell and the "smart money" begins to leave. Individual shares make a new high and then end lower by the end of the week. Those are "buying climaxes," and are a sure sign of "distribution" as opposed to "accumulation." Now is the time to prepare to short.
At the current stage optimism is at its most strident. Nothing can stop the advance. Wind, fire, water, major power failures and record levels of debt do little to deter the belief that we shall achieve levels of prosperity that we have only dreamt of. Yet the gaps that were left as the market jumped upwards wait to be filled. That is the law of the market. Why do you think that the words "mind the gap" echo in the underground stations around the City of London, particularly Bank station on the Central Line? That announcement is there to remind the youngsters of one of the cardinal rules of market forces.
Enjoy the euphoria, for it will remain a dim and distant memory for generations to come as, initially, the gaps of 325/330 in the Techwig, 12893/13020 on the WIG and 1061/1074 in the WIG20 are filled. I say initially as I do have a pessimistic view of what lies ahead. The ingrained inertia of custom and tradition are beginning to triumph over market forces.