Recency Bias

The behavior of human beings is easily conditioned, but it takes time.  At our core, we are just chimps with slightly bigger brains.  The stock market is both a giant casino and a nonstop crowd psychology experiment.  Recency bias keeps the crowd more focused on recent data points when markets had a waterfall decline (2020, 2018, 2015/2016, 2011) than older data points (2000-2002, 1973-1974). 

In 2020, you had a decline from top to bottom that lasted less than 2 months.  The Fed came to the rescue with bazooka QE and the US government did the biggest stimmy spew ever.  That was just 2 years ago, so that bias of the Fed coming to the rescue whenever the market plummets is still seared into the heads of investors.  60/40 stock/bond portfolios had a blockbuster performance, as 10 year Treasury yields got down to 0.36%.  

In 2018, you had a decline from top to bottom that lasted less than 3 months.  The Fed once again came to the rescue, this time, calling off future rate hikes that was priced into the market and making a dovish pivot and signaling future rate cuts in January 2019.  The market never looked back and grinded higher for several months after the December 24 2018 bottom.  60/40 did ok during the waterfall decline, and especially well in 2019, as both stocks and Treasuries rallied huge throughout the year.  

In 2015/2016, you had an up down up down move that lasted less than 2 months each, each one around 15%, so rather mild, and then followed by a relentless rally that lasted several months.  This time too, the Fed turned dovish, calling off rate hikes and pausing after doing a measly 25 bps in December 2015.  60/40 had a huge 6 month performance for the first half of 2016, as 10 yr Treasury yields went to all time lows at the time at 1.32%.  

In 2011, you had a decline from top to bottom that lasted less than 5 months, and with Treasuries going through the roof during the European debt crisis, providing a perfect hedge for equity longs.  The Fed embarked on Operation Twist, basically QE by lengthening the duration of their holdings, buying long duration Treasuries by selling T-bills.  60/40 portfolios held up very well during the whole downturn.  

So the last 4 waterfall declines were all brief, and followed by the Fed caving in to the market and making a dovish pivot.  Stocks bottomed and surged higher in the following months.  Treasuries rallied huge during all 4 declines and commodity prices went down even more than stocks during all 4.  That is the foundation for the psychology of today's investor.  They expect the Fed to come to the rescue, and that the market will rally huge for several months afterwards.  So they aren't giving up, and also aren't throwing in the towel on bets that Treasuries will go higher.  

That recency bias keeps many investors from worrying about a possible extended bear market, which is the more likely scenario based on the exuberance over stocks in the last few years, similar to what you saw in the early 1970s and late 1990s.  

Few people remember or consider what happened in 2000-2002, and even fewer what happened in 1973-1974.  Extended bear markets, with very few bear market rallies, basically stair step down for months until the final puke phase 2 years after the top.  Absolutely brutal markets for buy and hold investors, and just bad overall for permabulls. 

The SPX in 2000-2002:

The SPX in 1973-74:

I see 2022 as a combination of 2000 and 1973.  You had the dotcom bubble in 2000, and you had the bitcoin/big cap tech/ARKK speculative tech/meme stock bubble in 2021.  You had surging oil prices/inflation, as well as the Nifty Fifty in 1973.  You have surging oil prices/inflation and FANG/big cap tech in 2021-2022.  

Another savage selloff on Wednesday.  This market doesn't stop at down 2 or 3%.  It goes for blood, and goes down 4+%.  Huge chunks taken right back after the bulls got excited about a technical rally after the bottom last Thursday.  Even with my bearish tilt, I've been way too bullish on the short term time horizon, and have been waiting for a rally towards 4150 to short SPX and dump everything, including energy.  But the market trades like there are a million bagholders looking to sell rallies, which kills them before they can gather steam and lure in more suckers.  Just savage.

I will take a shot to put on some SPX longs today into this big gap down, but only for small size, matching my level of confidence on the long side.