How a bull market ends - the positive feedback loop that rewards dip buying breaks down.
"In the case of 1987, the Dow Jones hit its high in late July and then for weeks and weeks investors sat there wondering where the reward was for their latest purchases. There wouldn’t be a reward. It was an electric shock instead, occurring ten weeks or so after the positive feedback loop ceased to hold up its end of the bargain"Why quant "black box" strategies blow up as bear markets get started. (They're running short volatility trades using lots of leverage.)
"We are all doing this because we can all make a lot of money BEFORE they 'BLOW-UP'. And after they do 'BLOW-UP' nobody can take the money back from us." He then informed me why all these models actually 'BLOW-UP'. "Because despite what we all want to believe about our own intellectual unique-ness, at its core, we are all doing the same thing. And when that occurs a lot of trades get too crowded … and when we all want to liquidate [these similar trades] at the same time … that’s when it gets very ugly."Hussman continues being "too early" in his warnings.
"While the measures of market internals that we use in practice are far more comprehensive, the evidence from leadership, breadth and participation above provides a fairly obvious signal of internal dispersion in the market. In our view, that dispersion is a strong indication that investors are shifting toward greater risk aversion. In an obscenely overvalued market with razor-thin risk premiums, a shift in the risk-preferences of investors has historically been the central feature that distinguishes a bubble from a collapse."One of our favorite momentum investors is losing faith ("wrestling with selling all my stocks"):
"I don’t like what I’m seeing. Should I sell all my stocks and go 100% to cash? That’s the thought I wrestled with all weekend. I made a list of all the messes in the world — from slumping commodities to slowing China — and concluded the flow of money that has buoyed our stockmarkets since 2009 is evaporating and will no longer be with us. That means our markets must fall. Whether our markets will drop 23% in one day (e.g. 1987) or whether they just keep sliding I don’t know."That brings us full circle back to the first essay: "investors sat there wondering where the reward".