Mark Dow is one of the most thoughtful and experienced macro investors on the financial web.
In a new interview with ETF.com, he gives the most succinct and badass explanation for the formation of market bottoms you’ll ever see…
The way these processes tend to work is that first you have an extreme sentiment and positioning reading. And you have a bounce. And then at some point, among the people who are playing the bounce, sentiment starts to change and some get outright optimistic. At some point in that process, we can see signs that the fundamentals are improving in a way that validates that move.
But that move can be quite violent, because so many people say, ‘OK, this is it, this is the big chance. We need to get in emerging markets. We know this is a multiyear trade when it turns. And we don’t want to be left behind.’
But often these things turn out to be a false move. And then you retrace. And then people go back to the negativity they had before, but not as bad as the previous time.
You have these oscillations of relative pessimism and optimism until such point that the fundamentals start to change. That’s what the bottoming process looks like—a series of false rallies until one of those upward moves gets validated by fundamentals.