The 10th Man

Human Behavior

April 5, 2018

There are few things better than 1990s-era Bjork. Every late-wave Gen Xer’s crush. With the passage of time, she gets better and better. Her song Human Behavior should get you warmed up for this week’s issue.

I get a lot of email. There is (almost) no such thing as a bad email. Every one of them has informational content. Even if I were deprived of Bloomberg and charts and all sensory input, if I had access to my email I would probably still outperform the market. It is that good.

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So during the bull market, naturally there were lots of cranky people who were trying to figure out how to short it, or buy puts, or get negative exposure to the market somehow. They did this all the way up.

I discouraged it, because a trend ends when it ends and not a moment sooner.

But like I said —lots of cranky people trying to short the market.

Fast forward a month or two to today. The music has stopped and the stock market is in meltdown mode. You would think that people would be happy, right?

Actually, the opposite is true—my inbox is full of people who are looking to play for a bounce or buy the dip or get positioned for a short squeeze.

The direction of the market changed, and all the bears turned into… bulls. Not that they are bulls, really, but they keep trying to play countertrend rallies, instead of the actual trend (which is down).

The same was true on the way up—instead of playing the trend by being long stocks, they were fighting it all the way up.

Now they are fighting it all the way down.

This is the human condition, and I will tell you why it is the human condition. People have egos. Their egos tell them that they are right and the market is wrong. Most investors will fight any trend, tooth and nail, uptrends or downtrends.

Your ego is not your amigo.

In previous editions of The 10th Man, I talked about how we’ve moved from a trend-following regime to a mean-reverting regime, and that is true.

I talked about how that benefits traders versus investors, and that is true.

It is also true that we are in a new trend—a downtrend, and you can tell because the motive waves are bigger and the corrective waves are smaller.

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Peak Frustration

There are a lot of things that are super frustrating for me to watch. This “buy the first downtick” nonsense is at the top of the list.

Stuff takes a lot longer to play out than you think it will. Maybe that is Rule number 14 in Dillian’s Rules of Trading: have patience. Stuff takes a really long time.

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I mean, this bull market we just had took the longest of long times. It went on forever. I declared it dead last summer and was off by about seven months. I did better than most (we will talk about that call someday, I promise).

Even if your model of this correction is 1998 and not 2008, 1998 still took a long time to play out. It took a couple of months, and the market went down twenty percent.

Lots of people wanted to buy stocks the day that China’s retaliatory tariffs were announced. Again—this trade war thing is going to take a lot longer to play out than you think. It is not going to be over after one round of tit-for-tat.

If you have an idea for a trade, why don’t you put it in a drawer and sit on it for a month. Take it out of the drawer a month later and see if it moved in your favor. Most of the time, it does.

Some Last Points

This isn’t just about volatility—if it were, I’d say that we were through the worst of it. It is also about leverage.

In addition to stuff taking longer than you think to play out…

A deleveraging process does not stop halfway through.

There is a lot of leverage in the system, and maybe 5% of it has deleveraged. When deleveraging starts, it keeps going, and going, and going, until leverage has returned to normal.

I’m talking about the trillions in corporate debt. The trillions in buyout funds. Maybe risk parity. Reg T margin. The Swiss National Bank.

This is how it works. Either everyone gets out alive, or nobody gets out alive. We’ll see how this plays out. Crack open a Fresca.

Final Roll Call

This is the kind of stuff I talk and think about a lot in The Daily Dirtnap. Yes, it’s got a portfolio and market analysis and daily updates and a lot of ideas, but a good chunk of it is also an ongoing exercise in behavior management.

People are very good at outsmarting themselves in an attempt to outsmart other people. Managing your own psychology is probably the most important skill you can have in investing. It’s also one of the most difficult to get right.

So, I should let you know that the current offer to join The Daily Dirtnap closes tonight.

After midnight, you won’t get:

  • My “Break Glass in Case of Emergency” plan,
  • The most in-depth report on The Daily Dirtnap portfolio that I’ve ever done,
  • The most-emailed about issue of The Daily Dirtnap ever, and
  • One of only a few The Daily Dirtnap mugs that exist in the world!

If you’re nervous about what’s going on in the markets right now, it’s a great time to join.

And if you’ve even considered buying “the first downtick” then it’s a really great time to join…

As I said earlier, stuff takes a really long time—we are only in the first (maybe second) innings of this. You need to buckle up.

If you’re in, I’ll send you the extra reports right now, and your first issue tomorrow.

Jared Dillian
Jared Dillian


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Richard Davis

April 5, 2018, 1:28 p.m.

Re your comment about unwinding leverage: “There is a lot of leverage in the system, and maybe 5% of it has deleveraged. When deleveraging starts, it keeps going, and going, and going, until leverage has returned to normal.”

Why would the process stop at ‘normal’? Stocks can be overbought and oversold. Wouldn’t the same thing be true about leverage? What would an ‘under-leveraged’ world look like?

April 5, 2018, 9:44 a.m.

If you have an idea for a trade, why don’t you put it in a drawer and sit on it for a month. Take it out of the drawer a month later and see if it moved in your favor. Most of the time, it does.

Hey Jared,
Did you mean “moved in your favor” as in moved in the direction you expected, or did not move as expected and you’re glad you didn’t put the trade on?

Arsene Holmes

April 5, 2018, 9:23 a.m.

Excellent article.

Just wanted to give you a tip.

Ditch Bloomberg and save yourself $35-40,000 a year.

I had a terminal for 23 years non-stop and I thought I would not be able to work/live without one as I was so used to it. Litterally a year ago, I abandonned it and I haven’t seen a difference. There is so much available on the net and my broker provides me a lot of of instruments, charts, analysis etc that you really don’t need a Bloomberg.

Just a thought. Also, I think we are now in a Trading market as opposed to an Investing one which means one has to be alert and not get married to any position whatsoever


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