Thursday , 7 December 2023

The 4 Stages of Transition from Market Bottom to Market Top

From my perch, the prospects for a self-sustaining economic recovery are in doubt in the face of numerous headwinds. Despite the celebration of the certainty in a smooth and reinforcing recovery that seems to be at the foundation of the bullish cabal, the magnitude of monetary and fiscal policy decisions speak volumes of how fundamentally different conditions are now vis-a-vis past cycles. Moreover, the due bills from those remedies and the timing and response to the withdrawal of the outsized stimulation in 2008-2009 add further to the uncertainty of the slope of future economic growth and pose risks anew. Words: 573

In further edited excerpts from his original article* Doug Kass ( goes on to say:

Let’s take a look at the four classical stages in a move from market bottom to market top and then back again and discuss how they apply to the situation this time around.

Stage One:
Market bottoms are made when investors lose all sign of hope and fear is the dominating emotion. At bottoms, bears are deified and bulls are rebuked.

It was less than a year ago that prices were beaten down and the news flow was consistently reinforcing in its negativity. Economic expectations were uniformly bearish, as the credit and financial system seemed broken. Investors no longer believed. The fear of being in the markets overwhelmed market participants — so much so that on the day of the yearly low, a poll indicated that more than half of Americans believed we were entering the Great Depression II. Decades of buy-and-hold investing seemed to vanish and gave way to a preferred strategy of opportunistic trading.

Stage Two:
As stocks began their ascent from the March lows, signs indicated that things were getting less-worse as the second derivative recovery commenced. The liquidity put into the system in late 2008 and early 2009 began to flow into the capital markets. Credit spreads improved as the curse of cash began to manifest. In time, fiscal and monetary stimulation began to assert a hold, and improving economic conditions followed.

Stage Three:
In time (and with the impetus of higher stock prices and recognition that there were signs of economic improvement) the fear of being in the market began to be replaced by the fear of being left out. As deflated company forecasts turned out to be too pessimistic the news (importantly influenced by aggressive cost-cutting) improved and share prices moved comfortably above the March lows.

Stage Four:
Tops are born out of a rally in optimism and when bullish commentary multiplies. At tops bears are chastised and bulls regain their popularity and at tops investors want to believe.

Whether the stock market is topping out and the economy’s 2010 trajectory will disappoint is subject to debate but what probably can’t be debated – and something that truly astonishes me – is the brief period of time in which we have moved from fear to greed.