The Bias Towards Optimism Often Hides The Truth [edegrootinsights]


Long-term negative divergences in markets (capital flows) suggest dangerous markets.  For example, when transports lag, or fail to lead the industrials to higher highs, it suggests a deteriorating economic growth.  The following charts illustrate several of the major negative divergences since 1970:

  1. 1972-1973 divergence led 1972-1974 bear market
  2. 1985-1987 divergence led 1987 crash
  3. 1998-2000 divergence led the 2000-2002 bear market
  4. 2006-2007 divergence led the 2007-2009 bear market
  5. 2011-2012 divergence leads ??? mini crash or 2015-2017 bear market

Human beings from investors to friends thrive on optimism. Optimism is easy to embrace and makes everyone feel good. Unfortunately, optimism, which is highly influence by opinion, can blur reality to hide the truth.

How many times have you protected a friend from the truth due to the fear of being labeled pessimistic? Everyone wants to avoid that grizzly-gus or negative Nelly friend that talks about things they don’t want to here. As a result, people tend lie to prevent from being ostracized from their group. This is a large reason why companies failures and stock market declines are so quick and devastating.

The truth, like most things in nature, is harsh and decisive. The prepared thrive while those not more often than not fail.

Chart Dow Transports to Dow Industrials Ratio 1972-1988

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