Human nature causes the intellectually curious to look back on past irrational behavior and wonder how it could have occurred. For example, in:

1929:

It was not unusual to learn that one’s friends, family members, or neighbors had committed their life savings to trade stocks on margin based on “tips” from their cab driver, barber, or mailman. The “Roaring Twenties” were soon to meet the “Great Depression.”

Unbridled euphoria ultimately led to deep and lasting despair.

Opposites define our universe.

2000:

Or how about the great “dot.com” bubble of 1999-2000? Seemingly levelheaded folks suddenly invested vast portions of their net worth in a stock IPO or a new company that emerged in the previous year or two based on an idea. Most such issues had no hope of generating profits for years or even decades. “Investors” paid multiples of the company’s revenue per share to get a small foothold. As we know now, for every Google that emerged from that bubble, fifty dot.com darlings joined the trash heap of history. The NASDAQ Composite Average lost 79% of its value in the next two years.

A mountain of overblown optimism ended in a valley of exaggerated despair.

The universe has cycled from one extreme to the other since the “big bang” began its journey through open space.

2021:

As irrational, though, as had been these and other manic periods in the last century of stock market history, nothing comes even CLOSE to the descent into madness of the 2020-2021 period. That market energized millions of “self-proclaimed apes” to pour collective billions into names like Gamestop, AMC, and several companies on the steps of bankruptcy courts. Many “apes” used short-term call options to bet chunks of their life savings on such dubious market adventures. The insanity accelerated.

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Before we review the total insanity of the 2020-2021 period, let’s look at what led up to that particular mania. From mid-2016 into 2018, we witnessed this:

• Years of Zero Interest Rates and the Fed’s QE policy had engendered a belief in the infallible “Fed put.” As a result:

Riches appeared ripe for the picking as “the Fed put had removed risk from the equation.” Accordingly:

1. VIX registered the lowest fear in recorded history several times throughout 2017

2. The CNN/Money Greed Index at 95 noted its highest greed reading in recorded history on October 5, 2017

3. The NAAIM exposure level of Hedge funds registered its highest commitment in history in 2017 at 110% long:

It was in 2020, however, that the descent into complete insanity emerged:

“Speculation” is far too mild a word to describe the drunken casino atmosphere that had appeared on Wall Street by mid-2020.

Following are several examples among the many that emerged:

1. As the army of apes bought calls, a feedback loop moved stocks higher, causing the apes to buy even more calls, driving stocks prices higher still (note “the first time”):

2. 

3. Apple Corp’s valuation exceeded the entire Russell 2000! Indeed, by September 4, 2020, Apple’s market cap had exceeded the whole market cap of the Russell 2000. Speculation had driven one issue to a higher capitalization than not 20, not 200, but 2000 companies that we deal with every day. That’s Alexander & Baldwin, Allegiant Travel, Boise Cascade Company, Boyd Gaming Group, Brunswick, Ceasar’s Entmt Corp, Cheesecake Factory, Coca-Cola Bottling, Denny’s Corp, Hecla Mining Co, and a thousand nine hundred ninety more similar companies.- COMBINED.

4. The following record refers to the total dollars spent buying calls, the percentage of NYSE volume represented by these calls, AND the share of dollar value moving into call options daily compared to NYSE stocks. Each set records never before having occurred since humankind walked this planet.

   

   5. XX- Think about this: As billions poured into options daily, more than 75% of those $Billions went into options of less than 14 days of maturity! This level of pure, raw speculation makes the frantic activity of the 1920s look like a peaceful Springtime walk through the park. 

That’s madness. If these were not earmarks of the top, we can’t even imagine what would be.

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Knowing how those manias in 1929 and 2000 and all of the others in between ended, why do those– even those who have studied each of the critical market tops over the centuries ––still fail to get out and reverse position at the top?

As it turns out, the answer is all about the market’s nearly infinite ability to deceive.

In real-time, the factors driving a market higher and the fact that those calling it out would get proven wrong for weeks, months, and sometimes years- deceive even many of the brightest of traders into believing the four most ruinous words any market participant can utter:

“This Time Is Different”

Because it never is.” What happens today has happened before and will happen again.” Livermore

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The question before us today, on January 1, 2023, is, “How will this Bear Market end?”

It will end in the same way as do ALL bear Markets. More specifically, as we apply Bob Farrell’s Investment Rule #2:

Excesses in one direction will lead to an opposite excess in the other direction. This Bear Market will end in an emotional atmosphere OPPOSITE  of 2020-21.

After reviewing the 2020-2021 speculative insanity spelled out above, the question of this week becomes:

What will the OPPOSITE of that descent into madness look like? 

The gambling fever of 2020-2021 far surpassed those and every other top in the last century, surpassing the euphoria of the Roaring Twenties and the bubble that was Y2K.

If we close our eyes and imagine an opposite psychological environment to the speculative debauchery of 2020-2021, our wildest imagination comes up short in visualizing such fear, despair, and depression! 

If Bob Farrell is correct, the panic and capitulation at the bottom of the cycle in 2023-2024 will exceed anything markets have produced in the last century. We cannot visualize those extremes of panic and capitulation. But we can be and are forewarned and forearmed.

We won’t attempt to predict the specific metrics that will occur at the bottom. But we are prepared.

Let us utilize this universal truth to maximize profitability in the new year!

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