Earlier in my career, it used to take about 2-3 months for sentiment to change from being bullish to bearish (and vice versa). Now, it feels like it only takes about 2-3 weeks. Here are some reasons why.
1) We have so much information in real-time, especially our account balances. Years ago, people used to get monthly or quarterly statements from their brokerages. Now, everyone has their net worth available on their phones in real-time. This constant watching of balances and overkill of visibility is leading to higher levels of emotions. In addition, there are so many bloggers out there, multiple financial networks, and endless social media platforms inundating us with a lot of noise. They mostly promote fear because that’s what gets the views and keeps the ratings high.
2) We live in the most impatient world ever. Most people do 10 sit-ups and complain that they don’t have washboard abs. In the markets, most people want to make $10M in two days.
3) Because of this impatience, people are using A HUGE AMOUNT of leverage. Leverage includes options, weekly options, 0DTE options (over 50% of the options traded every day expire by the end of the day), futures, leveraged ETFs, options on leveraged ETFs, margin, and aggressively large position sizes. Therefore, when the market has a normal pullback, too many people get wiped out. Also, this isn’t just occurring with retail traders. Many institutions are using insane amounts of leverage as we have seen recently with the yen carry trade.
4) We live in the weakest generation of people ever. If this offends you, then you are one of them. This week is a perfect example. The same people who complain that the Fed is interfering too much in the markets were screaming for an emergency rate cut on Monday because the market was gapping down 2-3%. This overall weakness leads to extreme levels of fear very quickly when, most of the time, it’s just a normal pullback for the markets.
I will be discussing this in more detail this week on The Compound and Friends podcast and will post this link here after the recording becomes available.
I can be reached at: jfahmy@zorcapital.com.
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