Short-covering And The Kubler-Ross Cycle

Macro Man enjoyed the weekend, and not just because the sun made one of its all-too-rare forays from behind the clouds over south-eastern England. Spending a couple of days away from the daily grind of the screens offers a chance for reflection and contemplation, which often pays dividends further down the road.

The drum-beat of short covering (or is that government buying?) continued its inexorable march last week, in the process unearthing the carcasses of yet more once-profitable trades. Over the weeend, it occurred to Macro Man that psychology might offer a useful signpost for determining how far along we are in this process. So he turned to the Kubler-Ross model for dealing with grief. See how far along you are with this process:

Stage 1: Denial. We've all been there: "This &%^&*%^ market is so stupid! This thing is gonna turn around any day now once these knucklesheads stop buying." Check. Macro Man was there in mid-March.

Stage 2: Anger. "Dammit, this is starting to cost me some serious dough. ENOUGH ALREADY!" For Macro Man, stage 2 follows swiftly on from stage 1. It felt like he spent about four weeks in this stage with his Singapore trade.

Stage 3: Bargaining. "If I can just get back to my entry level, I'll close this position out." How many times have you said/heard that one in your investing lifetime? And how many times has the individual who uttered it actually closed his risk if he's lucky enough to see his bad position get back to flat? Most often, emboldened by the eradication of a loss, the temptation is to add, so that you lose even more the next time around.

Stage 4: Depression. "I suck. I'm so cold right now, you have to measure my investment performance on the Kelvin scale." You don't have to be Sherlock Holmes to recognize that Macro Man (and, no doubt, numerous others) have been in this spot for a while.

Stage 5: Acceptance. "Well.....there is a lot of cash on the sidelines. I don't think we've seen the lows, but could we nudge up to 950? Yeah, sure we could." Macro Man knows a few people who think this way, but he's not sure if it's consensus yet. To be sure, the majority of readers are bearish equities, and a plurality are short/underweight. Personally, Macro Man reached this point when he started hangin' with Costanza; while that little foray was profitable, he's now well out of it and has a relatively blank slate.

One argument in favour of the market's being at this stage has been the downdraft in implied volatility across asset classes. VIX is at its lows of the year....

...as is currency vol...
...while fixed income vol is also near its lows.
As befitting someone who's been through the Kubler-Ross (or at least had a bit of a cold streak), Macro Man has dialled down the risk and is trying to clear his mind. His own medium-term biases remain intact, however, so he looks forward to the day when he can help the weak-handed equity longs and FX carry traders go through their own version of the cycle.
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16 comments

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Anonymous
admin
April 20, 2009 at 10:39 AM ×

Yes, grief should be shared by the community at large. As you are looking at the red fyuts on the Bloomberg terminals now, perhaps Mr. Lewis will share his pain with all and sundry soon.

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Anonymous
admin
April 20, 2009 at 11:53 AM ×

not sure if true or not but can't be too far off the mark

http://turnerradionetwork.blogspot.com/2009/04/leaked-bank-stress-test-reults.html

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Anonymous
admin
April 20, 2009 at 12:21 PM ×

Shocking if true. Compare with this version:

Stress Test Results: Most Banks Likely to Pass

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Anonymous
admin
April 20, 2009 at 12:53 PM ×

Read about the Hal Turner who is reporting that "leak". I'm sceptical.

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BlueMonday
admin
April 20, 2009 at 1:35 PM ×

Still net/net , ted spreads in Eur and usd are widening for the 1st time in a while ... many bank related instruments are priced for perfection and are vulerable here ... maybe time to revist long Shatz here ... through options with vol. now really low ?

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Banker
admin
April 20, 2009 at 4:44 PM ×

This is a great post. I have been there and I am sure will be there again.

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Anonymous
admin
April 20, 2009 at 5:27 PM ×

well didn't take long for carry trades to find p&l hell --

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Skeptical Smith
admin
April 20, 2009 at 6:29 PM ×

does the market really reacts to news(old)about bank loans loose? this people use to be more creative.

MM, do you believe that this may be sponsored state rally as you mentioned?

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Macro Man
admin
April 20, 2009 at 9:19 PM ×

Skeptical, not really, but there is enough smoke and dodginess everywhere else but it certainly wouldn't surprise me if it were true.

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Anonymous
admin
April 21, 2009 at 3:54 AM ×

angst is really heavy over here again about the us dollar going up...everybody hates the dollar as it affects their equity longs, their commodity longs, and their currency longs, so the typical post is 'why why why, when will it stop'

thanks in advance for any M-M pearls on us dollar!
-deac

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Anonymous
admin
April 21, 2009 at 7:16 AM ×

I've also thought about the seven stages of grief, but more in the context of where the populace stands vis a vis coming to terms with the way the world has changed, home equity is lost, retirement savings is lost, jobs are uncertain and a long time coming back, investment opportunities are neither safe nor reasonably remunerative, and on and on. I don't think were are out of stage 2. Government is offering comfort and the usual palliatives, but not much leadership into the brave new world ahead.

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fodacadillac
admin
April 21, 2009 at 3:35 PM ×

March was a perplexing month for me to say the least. I remember buying USD/JPY on dips but thinking...."I'm not getting married to this nascent optimisim".

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Anonymous
admin
April 22, 2009 at 12:02 AM ×

I think most people looking at VIX for information are making a mistake by focusing on spot VIX which mostly regurgitates old info instead of looking at forward vol which has been well supported.. For example look at 6th VIX future (UX6 Comdty on Bloomberg).. We have seen series of 4 higher lows since November.. Although granted the highs have been successively lower

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Andrew
admin
April 22, 2009 at 11:57 AM ×

Nicely said in cartoon form on Robot Chicken :)

http://tiny.cc/HDE9n

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Andrew
admin
April 22, 2009 at 12:00 PM ×

Let's get the link correct this time.

http://alturl.com/ugeh

Short funny market commentary :)

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Andrew
admin
April 22, 2009 at 12:02 PM ×

Must be a blogger thing with shortened URL's? Can't get it to work sorry.

Just google for Giraffe stuck in sand

Enjoying your blog.

Cheers,
Andrew

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