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2018-10-25 07:00 by Karl Denninger
in Market Musings , 161 references
[Comments enabled]  

Markets do not crash from highs.

Indeed they nearly always crash from severe oversold conditions -- that is, on "local" lows.

The reasons for this are somewhat complex but come down to psychology.  Every night some number of people wake up in a cold sweat thinking they're going to lose all their money.  Some other number of people wake up with a huge, raging hard-on thinking they're going to make a fortune.  They meet during the day, or even overnight now with the futures, and hit "buy" or "sell."

The day none (or effectively none) of the people have hard-ons is the day the market crashes.

The reason this almost-never happens from "highs" is that there are plenty of people with hard-ons when the market is rallying.  It's only after dippy gets his head cut off a few times trying to buy bounces that they fail to show up.

Are we there yet?

Probably not.  But we're a hell of a lot closer than we were a few months ago.

You need both that sort of situation and the precursor -- a whole bunch of companies with 100+ P/Es, or even worse, firms making no money at all but flying high and successfully selling ever-more debt in the "high yield" marketplace, to set the stage.

That we have.

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