We Are in a Downtrend, and the Reversal Will Take Time

Jared Dillian  |

During the bull market, lots of cranky people tried to figure out how to short it, or buy puts, or get negative exposure to the market somehow.

They did this all the way up.

Fast forward a month or two to today. The stock market is in meltdown mode. You would think that people would be happy, right?

Actually, the opposite is true—my inbox is full of people who are looking to play for a bounce or buy the dip or get positioned for a short squeeze.

The direction of the market changed, and all the bears turned into… bulls. Not that they are bulls, really, but they keep trying to play countertrend rallies, instead of the actual trend (which is down).

The same was true on the way up—instead of playing the trend by being long stocks, they were fighting it all the way up.

Now they are fighting it all the way down.

This is the human condition, and I will tell you why it is the human condition.

People have egos. Their egos tell them that they are right and the market is wrong. Most investors will fight any trend, tooth and nail, uptrends or downtrends.

Your ego is not your amigo.

Trend Reversals Take time

There are a lot of things that are super frustrating for me to watch. This “buy the first downtick” nonsense is at the top of the list.

Stuff takes a lot longer to play out than you think it will.

I mean, this bull market that we just had took the longest of long times. It went on forever. I declared it dead last summer and was off by about seven months. I did better than most.

Even if your model of this correction is 1998 and not 2008, 1998 still took a long time to play out. It took a couple of months, and the market went down twenty percent.

Lots of people wanted to buy stocks the day that China’s retaliatory tariffs were announced. Again—this trade war thing is going to take a lot longer to play out than you think.

It is not going to be over after one round of tit-for-tat.

Deleveraging Has Just Started

This isn’t just about volatility—if it were, I’d say that we were through the worst of it. It is also about leverage.

In addition to stuff taking longer than you think to play out…

A deleveraging process does not stop halfway through.

There is a lot of leverage in the system, and maybe 5% of it has deleveraged. When deleveraging starts, it keeps going, and going, and going, until leverage has returned to normal.

I’m talking about the trillions in corporate debt. The trillions in buyout funds. Maybe risk parity. Reg T margin. The Swiss National Bank.

This is how it works. Either everyone gets out alive, or nobody gets out alive. We’ll see how this plays out. Crack open a Fresca.

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