When the crash can no longer be denied, the drop is widely recognized as having been obvious and inevitable..
The last chance to exit is well-known in stock trading circles, but the concept can be applied much more broadly. The basic dynamic at work is a mismatch between the fundamentals (i.e. the real world) which are deteriorating due to structural changes and the psychology of participants which continues to be confident and upbeat.
A wide spectrum of emotions and human traits are in play, but the core dynamic is our desire to discount signs of trouble rather than deal with a long-term change in the tides. The long uptrend supports confidence that the uptrend will continue moving higher more or less permanently, and the desire to keep minting money by staying fully invested in the uptrend encourages cherry-picking data to support the idea that the fundamentals are still solid.
Selection bias, denial, complacency and greed all play parts in this continuation of the psychology of an uptrend even as the S-Curve has shifted from growth to stagnation as the fundamentals have deteriorated beneath the surface.
This asymmetry between the fundamentals of valuation and the psychology of valuation cloaks the change in trend so few recognize it as the last chance to exit. Participants, so well trained by years of profits to “buy the dip” and anticipate future gains, see the initial dip as an opportunity to buy rather than as a warning sign.
This complacency is reinforced by the prompt reversal of any dip and a new high in valuations. Again, this dynamic is not limited to stocks; the ascent of housing valuations feeds the same complacency and selection bias: housing can’t go down because…the litany of supportive narratives is always long and illustrious.
The last chance to exit is also present in states, cities, industries, jobs, institutions, groups and neighborhoods. The decay is ignored as everything seems to remain glued together and the rot is papered over by various pronouncements and policies.
There is typically a period of consolidation that further supports a complacent confidence that the present is immutable: the uptrend is permanent. But this consolidation is misleading: it’s not a continuation of the uptrend, it’s the result of first-movers selling to True Believers in the immutability of the present and getting out of Dodge.
