Premature calls for a trend reversal are common in every cycle. During a bull market, there is always one group more bearish than the others talking about overvaluation and anticipating a fall. During a bear market, there is always one group more bullish than the others talking about a bottom and anticipating a recovery. This happens because These “contraries” know that the big gains are achieved in reversal moments. So, at all times and everywhere, they see the longed-for object. After all, to the person with a hammer in hand, everything looks like a nail.
It is true that the opponents who succeed, in effect, do make a lot of money thanks to their clairvoyance. But that is not the case with wrong opposites. These “premature” contrarians end up selling very cheap during a bull market and buying very high during a bear market.. During the last Bitcoin rallies, we have been able to read taunts and jokes for people who sold on Twitter and the other networks.
For example: CZ, CEO of Binance, in a tweet on August 11, wrote that he felt sad for the people who sold into the “fund”. This was said by him after a bear market rally. And you can already imagine the comments on that tweet. Most celebrated the end of the bearish streak at the top of their lungs.
Well, those people who caused so much sadness in CZ can now buy at better prices. Suddenly, now they are the ones who feel sadness for the losses (realized or not) of others. It turns out that the alleged fund, implicitly declared by CZ in that tweet, was not such. And the market set a new bottom a few weeks later. That is, hePremature opponents are very dangerous. In their delusional optimism and impatience, they give very bad advice. They feed false hopes.
During a bear market, the trend is down. What does that mean? That means that the chances that the price will go down are greater than the chances that the price will go up. This means that the increases during that stage are exceptional. And of course, not every rally is a trend reversal. In fact, most rallies during a bear market are failed attempts.
A trend reversal is usually triggered by a significant change in expectations. That is to say, the reversal occurs, because a real hope of change has arisen. In the specific case of this bear market, optimism comes to us with the assumptions of a turn by the United States Federal Reserve in its monetary policy.
What is the problem with this? The problem is that the bulls have been stubbornly insisting on that assumption for months. Nevertheless, Everything seems to indicate that this assumption (for now) is unfounded. Optimism arises at the first opportunity. And one piece of good news is enough to resurrect the assumption for a twist again. The market gets excited and does not wait for confirmation. They are getting ahead of the facts. So, a favorable inflation report generates a bullish rally. A drop in natural gas prices in Europe generates a bullish rally. And a partial relaxation of the covid-19 restrictions in China generates a bullish rally. Is this enough to claim victory?
These bullish waves have become a headache for the Federal Reserve. The notion that the market expects a turn in monetary policy in the near future is a failure in its communication strategy.. Why doesn’t the market believe them? If the market thinks the Fed won’t finish the job, these “expectations” make the Fed’s job much more difficult. That undermines your credibility. And the lack of credibility in a central bank usually translates into higher inflationary pressures. The mere fact that people expect an increase in prices, due to bad monetary policy, increases spending. Which forces the members of the Reserve to be tougher in their speech for the next time. In this way, lower expectations. In the process, goodbye bullish rally! (again).
Certain. Sooner or later, that turn will take place. But, for this change to take place, we need several consecutive months of favorable inflation reports. Inflation must come down. It should go down substantially. And it should stay down for a while. After this occurs, we can talk about a twist. If, on the other hand, the Federal Reserve falls into the trap of giving in to pressure and, in effect, surprises us with a hasty turn, the problem will only get worse. Because it would be making the same mistake that was made during the 70s. So, a crisis of two or three years can be transformed into a crisis of a decade or more.
It is very rare that a trend reversal occurs on unfounded assumptions and wishful thinking. This is typical of bear market rallies that feed on false hope. Which is a very normal thing during a bear market. And it is a natural and characteristic part of the prevailing volatile climate in times of high uncertainty.
Exaggerated pessimism is as blinding as wishful optimism. Uncertainty generates many doubts. And, with doubts, comes volatility. Bulls do not want to miss opportunities. And bassists don’t want to lose money. Consequently, the market becomes a roller coaster due to these two pressures.
Of course, the failures in the production and distribution chains have improved compared to twelve months ago. A year ago, port jams were a disaster. That has improved a lot, for example. The problem with the supply of semiconductors and used cars was still raw. And certainly markets are likely to be better adapted to the distortions caused by the Russian invasion of Ukraine in the coming months. Which will surely lower the prices of various items. Lastly, China will surely have a 2023 without so many restrictions. What is not bad. I mean, yes there are many reasons for optimism.
Nevertheless, It is one thing to have reasons for optimism and quite another thing to decree the end of the crisis. It is true that we have won several battles, but the fight will become tougher for next year. We must remember that the goal is 2% interannual inflation. Which is not easy. Above all, it’s not easy with a still extremely overheated US job market. We cannot so easily assume that a battle won represents the final end of the fight. We cannot so determinedly discount the possibility of setbacks, obstacles and delays in our future. Our problem is complex. And the solution is just as complex. Here we are not eating tangerines. People get excited easily, because human beings are deluded by nature. He is very prone to hopes (false or real).
Disclaimer: The information and/or opinions expressed in this article do not necessarily represent the views or editorial line of Cointelegraph. The information presented here should not be taken as financial advice or investment recommendation. All investment and commercial movement involve risks and it is the responsibility of each person to do their due research before making an investment decision.
It may interest you:
Investments in crypto assets are not regulated. They may not be suitable for retail investors and the entire amount invested may be lost. The services or products offered are not directed or accessible to investors in Spain.