Born in Pessimism, Grow on Skepticism, Mature on Optimism, and Die on Euphoria

In larger market cycles when attempting to find a top or bottom, look interest responses to widely anticipated events.

On October 13, 2022 (what has to date been the bottom in the stock market drawdown), in the middle of inflation euphoria, there was a “hot” inflation print (inflation was higher than expected) and the markets opened materially lower. The talking heads couldn’t get any louder and everyone was talking about inflation. However, over the course of the day markets rallied tremendously. Bad news was received positively (not as bad as we thought) and that flipped the short/mid-term bias.

In a similar manner, on January 24, 2023 Microsoft reported quarterly earnings that came in below analyst consensus (bad news). The next day the stock opened down ~4%, but then rallied back to even on huge volume. Since this reversal event, MSFT has been one of the best stocks in the market — bad news that was received positively.

This is the type of behavior we should expect to see at, near, before, and after a major bottom. In 2021 and 2022, we saw the exact opposite whereby companies were beating consensus revenue and earnings estimates, but the stocks were not supporting further gains — good news received poorly.

Picking long-term tops and bottoms is hard.