“Observing how various measures of risk premia and other metrics behave allows us to figure out where we are in the cycle.
Note that some of these phases necessarily overlap, so there is not a discrete jump from one to another:
** Denial: the classic initial refusal to believe that anything
is different from the last 20 times you successfully bought a little dip.
** Anger: As losses intensify, phrases like “this market is so stupid” are heard more and more often.
** Panic: liquidity evaporates, risk premia and volatility soar, and even favorite trades are sacrificed in the name of risk reduction.
** Response: Policymakers offer up a response to solve the
underlying issues, and despite initial hopes markets keep
falling… BUT WITH LOWER VOLATILITY.
** Resignation: When it feels like the terrible trend will go on forever, at last a reversal is in sight.
You needn’t be Hercule Poirot or Sherlock Holmes to arrive at the conclusion that we’re in the panic phase of the cycle but are entering the response phase. Using the GFC (Great Financial Crisis [’08]) as an analogue, I’d suggest to you that we are in roughly the late October/early November 2008 phase of the proceedings.”
If he’s right, we’ve several months to go (market bottomed March ’09).
Of course I don’t know that he’s right, but my own analysis also suggests low probability that we’ve yet seen the worst of it…