Phases of Recovery
After a stock market correction, there tends to be distinct phases to the eventual recovery. The downturn creates fear and herd behavior; fear begets even more fear. Even some professionals succumb and sometimes panic. After some sort of climactic behavior and sell-off, the first phase of recovery is characterized by disbelief. There is little to no confidence that the worst is over. Many pundits begin talking about retests, false dawns, or an unsustainable technical bounce.
The next phase can be characterized by grudging acceptance. After the smart money has already come in, others gradually concede that maybe the worst is over. The third phase is one of rising confidence. This may last for quite a long time. It tends to be the longest lasting of all the phases. Eventually this phase culminates in over confidence or even jubilation. That is followed by another downturn and the whole process starts all over again. In each phase there can be plenty of ups and downs, but the trends hold.
We believe the market is still in the grudging acceptance phase. Hopefully there is a long way to go before we get to jubilation. Certainly, no description of collective human behavior runs true to form. However, past behavior is very helpful in understanding current events. They are guidelines, not precise road maps. So far, the current recovery is tracking close to the classical description. We are watching carefully and remain optimistic; stay steady, my friends.
The Lonely Bull