As confidence ebbs and flows, people behave differently and perceive reality differently, and they do so collectively without being consciously aware of doing so. The exact same events can be rationalized totally differently depending on whether the prevailing mood is pessimistic or optimistic.
Social mood is extremely ‘catching’ (see mirror neurons), and is the foundation of herding behaviour, of which markets moves are but one manifestation. Market timing involves probabilistic predictions based on herding behaviour. For this to be possible without foreknowledge of specific future events, about which foreknowledge is impossible, those events must not be causal to market moves.
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This fall is a reasonable possibility for the resumption of the decline, following a late summer recovery high. This is, however, not cast in stone. As a trend progresses, more and more people buy into it, until it begins to win over even the skeptics.
The more hold-outs who capitulate to the trend, the closer it is to a reversal. Already we are seeing some notable bears sounding uncharacteristically optimistic. They may not yet be accepting the recovery mantra, but they are seeing the rally lasting for a long time.
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Once the decline resumes, liquidity should dry up again very quickly. The rally has seen liquidity return with tentatively increasing confidence, which has made covering up the toxic mess very much easier, but that will prove to be very temporary. As liquidity disappears again, the intractable problems will be laid bare again, leading to a logjam in the financial system and rapidly increasing pressure for it to burst in a market cascade.
In a very real way, confidence IS liquidity. A firesale of assets could originate almost anywhere, which would reprice asset classes across the board. The CDS market in particular is a powder keg with a short fuse.
I expect the coming decline to be longer and much stronger than the downward phase, so next year should be an almost unmitigated disaster from start to finish. If you are still waiting to cash out then I would not wait much longer
