In 1991 in the book “The Nature Of Risk”, Justin Mamis describes The Sentiment Cycle. According to Mamis this illustrated charts represents The Bottom Of The Bear Market "a graphical representation of the manic depressive moods typically experienced by market participants as a function of time and price in one complete sentiment loop.”
In simpler words what we have here is a repeated pattern through time illustrating the psychology of market participants.
Here’s Mamis explaining each feature of every phase:
Returning Confidence
By the time confidence is fully restored, the markets have been rallying for some time. They start to get choppy and retracement moves get consecutively more fierce, each one more intimidating than the last.
Buying the Dip (The Big Dip)
A huge pullback now gets underway, even larger than the scary one you may have witnessed last month or so. After such a dynamic bull run, investors are willing to take on a phenomenal amount of risk, and the smart money buys the big dip. Also, money is still flooding in from the general public, who likely read in The Sun that stock markets will remain strong for all eternity.
Enthusiasm
At this stage, all economic data still supports the idea of higher prices. Traders who didn’t get involved in the last-dip buying opportunity now have hard evidence that it worked before. All of the traders who wanted to be long are now long (there are no more buyers), causing prices to decelerate. Distribution starts to take place, i.e. stocks transfer hands from smart money to stupid money—strong to weak.
Disbelief
Traders start to get that gut-wrenching feeling that something may be changing, but the fundamentals still don’t back this up, and people cling onto hope alone. Analysts start to get subtle warnings. Maybe previous market leaders start to break below important support levels or moving averages.
Overt Warning/Panic
Typically there’d be a catalyst here (i.e. big banks like Lehman Brothers start to file for bankruptcy… sound familiar?). The index will break below a previous reaction low or maybe the 200-day moving average. News readers will be telling the world that the fun is now over. Intelligent investors start to sell rallies, giving stock prices little or no chance of any recovery.
Discouragement and Aversion
Prices have been rattling off for some time now as the general public starts shedding stock and the short sellers are stronger than ever. There’s no good economic news flow and everyone thinks that stock markets will go down forever.
Wall of Worry
Certain market sectors will now start to bottom out as everyone who wanted to sell has done so. The smart money now starts to move in slowly, resulting in the market pausing for breath or drifting along sideways for a few months. There are no sellers left; so despite the bad news flow, markets start to creep higher. Short sellers start to cover their positions, adding fuel to the fire.
Aversion to Denial
Markets start to trend upwards. Short sellers start to get concerned that sentiment has changed. With no sellers above the market, these sorts of moves can be fast and sharp and tend to leave people behind.
While looking at Bitcoin I realised The Sentiment Cycle seems to have been playing out for the the last two years.
@everyone Here’s how:
The return of confidence Mamis was referring to as the first phase has happened in the Spring of 2021 with Bitcoin & crypto in general.While the move from 20k to 60k was powerful and fast, each successive move up above 60k started to get more choppy. This was a warning sign many ignored at that time.
What followed shortly after was the massive Dip. Price dropped back down hard, but the confidence of investors was still high. Having witnessed such massive gains between 2020-21, people still aggressively bought the dip in an attempt to “return to the good old profits”.
We then see the Enthusiastic Phase taking place. Prices rise fast, giving few chances to get in. Most traders are long, but the first signs of weakness start to appear.
Bitcoin starts then to drop. First breaking 60k. Then 50k. The subtle waring have now appeared. Those which decreased their risk are the few, while the majority still continues to take the “buy the dip” attitude.
Finally the market crashes. What was apparent becomes now obvious. This happened during May - June 2021 for Bitcoin. The catalysts were LUNA & Celsius, two of the most profitable crypto corps. at that time.
Where are we now ?
Panic is gone. The signal this is a bear market rally has been given. What we see since August Top is discouragement and aversion. Like Mamis explains, in this phase there are no good economic news flow (inflation, rate hikes...) and everyone thinks the market will go down forever.
This phase could take anywhere from a few months to more than a year. With BTC I think it will take until Q2 2023 at least.
However, what’s important here is not just time, but price. With discouragements sellers are in control and they will push the prices lower. What happens is that BTC has 90% chances will bottom below 16k in this bear market, breaking below the June panic phase level (17.4k). How much below it ? My prediction is somewhere between 11-13k during November - January 2023.
In 2023-24 smart money will start to get back in. This is the Wall of Worry moment of The Sentiment Cycle, where the smart money moves in slowly, accumulates the lows and keep the prices relatively stable despite bearish or bullish news coming in. An experience investor will know when we are there.
Last phase is aversion to denial. Bitcoin will be at the highs of the panic phase (28-36k), but most will be too concerned to take action because of what happened before.They will doubt the rally will continue and prepare for the worse to happen, only to be left behind. The bull market starts here in full force.
In simpler words what we have here is a repeated pattern through time illustrating the psychology of market participants.
Here’s Mamis explaining each feature of every phase:
Returning Confidence
By the time confidence is fully restored, the markets have been rallying for some time. They start to get choppy and retracement moves get consecutively more fierce, each one more intimidating than the last.
Buying the Dip (The Big Dip)
A huge pullback now gets underway, even larger than the scary one you may have witnessed last month or so. After such a dynamic bull run, investors are willing to take on a phenomenal amount of risk, and the smart money buys the big dip. Also, money is still flooding in from the general public, who likely read in The Sun that stock markets will remain strong for all eternity.
Enthusiasm
At this stage, all economic data still supports the idea of higher prices. Traders who didn’t get involved in the last-dip buying opportunity now have hard evidence that it worked before. All of the traders who wanted to be long are now long (there are no more buyers), causing prices to decelerate. Distribution starts to take place, i.e. stocks transfer hands from smart money to stupid money—strong to weak.
Disbelief
Traders start to get that gut-wrenching feeling that something may be changing, but the fundamentals still don’t back this up, and people cling onto hope alone. Analysts start to get subtle warnings. Maybe previous market leaders start to break below important support levels or moving averages.
Overt Warning/Panic
Typically there’d be a catalyst here (i.e. big banks like Lehman Brothers start to file for bankruptcy… sound familiar?). The index will break below a previous reaction low or maybe the 200-day moving average. News readers will be telling the world that the fun is now over. Intelligent investors start to sell rallies, giving stock prices little or no chance of any recovery.
Discouragement and Aversion
Prices have been rattling off for some time now as the general public starts shedding stock and the short sellers are stronger than ever. There’s no good economic news flow and everyone thinks that stock markets will go down forever.
Wall of Worry
Certain market sectors will now start to bottom out as everyone who wanted to sell has done so. The smart money now starts to move in slowly, resulting in the market pausing for breath or drifting along sideways for a few months. There are no sellers left; so despite the bad news flow, markets start to creep higher. Short sellers start to cover their positions, adding fuel to the fire.
Aversion to Denial
Markets start to trend upwards. Short sellers start to get concerned that sentiment has changed. With no sellers above the market, these sorts of moves can be fast and sharp and tend to leave people behind.
While looking at Bitcoin I realised The Sentiment Cycle seems to have been playing out for the the last two years.
@everyone Here’s how:
The return of confidence Mamis was referring to as the first phase has happened in the Spring of 2021 with Bitcoin & crypto in general.While the move from 20k to 60k was powerful and fast, each successive move up above 60k started to get more choppy. This was a warning sign many ignored at that time.
What followed shortly after was the massive Dip. Price dropped back down hard, but the confidence of investors was still high. Having witnessed such massive gains between 2020-21, people still aggressively bought the dip in an attempt to “return to the good old profits”.
We then see the Enthusiastic Phase taking place. Prices rise fast, giving few chances to get in. Most traders are long, but the first signs of weakness start to appear.
Bitcoin starts then to drop. First breaking 60k. Then 50k. The subtle waring have now appeared. Those which decreased their risk are the few, while the majority still continues to take the “buy the dip” attitude.
Finally the market crashes. What was apparent becomes now obvious. This happened during May - June 2021 for Bitcoin. The catalysts were LUNA & Celsius, two of the most profitable crypto corps. at that time.
Where are we now ?
Panic is gone. The signal this is a bear market rally has been given. What we see since August Top is discouragement and aversion. Like Mamis explains, in this phase there are no good economic news flow (inflation, rate hikes...) and everyone thinks the market will go down forever.
This phase could take anywhere from a few months to more than a year. With BTC I think it will take until Q2 2023 at least.
However, what’s important here is not just time, but price. With discouragements sellers are in control and they will push the prices lower. What happens is that BTC has 90% chances will bottom below 16k in this bear market, breaking below the June panic phase level (17.4k). How much below it ? My prediction is somewhere between 11-13k during November - January 2023.
In 2023-24 smart money will start to get back in. This is the Wall of Worry moment of The Sentiment Cycle, where the smart money moves in slowly, accumulates the lows and keep the prices relatively stable despite bearish or bullish news coming in. An experience investor will know when we are there.
Last phase is aversion to denial. Bitcoin will be at the highs of the panic phase (28-36k), but most will be too concerned to take action because of what happened before.They will doubt the rally will continue and prepare for the worse to happen, only to be left behind. The bull market starts here in full force.
King
