Last Chance to Get Out before The Crash
The comments below are an edited and abridged synopsis of an article by Charles Hugh Smith
Every asset bubble has a last chance to exit before the crash, an opportunity that becomes obvious in the aftermath. But at the time, this opportunity is difficult to identify for a number of reasons.
One is that the mood at the top of bubbles is extreme confidence that more gains lie ahead. Everyone who called the top of the rally has been wrong, and everyone who shorted the rally has been wiped out.
The last chance to sell doesn’t give itself away; it is at best ambiguous, as all topping signals tend to be, enabling bulls to declare that the top is far from in and bearish signals have been nullified.
The classic last chance follows an apparent breakout to new highs that exceeds previous resistance. The breakout proves to be false, but at the time bulls think it is yet another breakout and a reliable signal for more gains ahead.
Everyone who sold on dips is anxious to get back in, so every dip is reversed by buy-the-dip purchasers who have been well rewarded in the past.
Traditional signs of a top are mooted by the advance. The rally exceeds levels that were bearish triggers, and the consensus that further advances are guaranteed supports traders who continue to be all-in the market.
The first decline off the last chance to exit is bought, but the rally falters. Buy-the-dippers dismiss it and buy the second dip. That too falters, and once the third buy-the-dip fails to make previous highs, many buy-the-dippers have been wiped out and the buying momentum slackens.
When it’s clear that buy-the-dip has failed, the selling becomes an avalanche and the market crashes.
None of this is visible until it’s too late to exit with profits. By the time the dust has settled, those who believe in more gains ahead have been wiped out by the crash they reckoned was impossible.
Is this the last chance to get out before the crash? Bulls are confident for reasons that have worked very well, and bears have been reduced to mumbling about elevated risk.
An interesting feature of the last chance to get out is that nobody sees it until after the crash has done its damage. Only when it’s too late does it become painfully obvious.
