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Risk Management

Permabears And Permabulls Are Two Extremes

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Permabears never disappear; they are always active, even when momentum is strong and the market is at all-time highs. But the behavior of permabulls is interesting, to say the least.

I am convinced that being a permabear is not so much about the markets in particular but rather part of a broader ideology that despises the current economic system and wishes for its destruction. This may not be true for all permabears, but it is true for a significant fraction of them. I cannot fight ideology; it is a religion based on a belief system rather than solid analysis.

In almost all cases, those who despise the current economic system fail to provide sound alternatives other than wishful thinking. For example, although relentless deficit spending could have severe ramifications, going back to a gold standard is fraught with difficulties and could lead to many more problems than the economic system currently faces.

However, there is always the other side of the story: while permabears are always active on the financial mainstream and social media, trying to convince everyone that the market will crash and then celebrating when it does, most permabulls just disappear during market corrections, except those who are trying to pick bottoms.

In a way, permabulls are as dangerous as permabears. One could argue that financial social media accounts, who consistently edit, refresh, and publish the same articles about the advantages of buying and holding, or even dollar-cost averaging, due to their “look at this long-term chart of the stock market, it has always gone up” approach, do not have a skin-in-the-game in the solutions they propose.

  • Have they ever tried to add to positions when the market is falling hard and is more than 30% below all-time highs?
  • How comfortable did they feel when the market was down 35% or even 45% from all-time highs, such as in 2022 or 2008? Did they panic or not?
  • What is their plan in the event that market losses accelerate when they are averaging or holding? Even amateur traders describe averaging down as “trying to catch a falling knife.”
  • If permabulls are accusing permabears of attempting to time tops, why are they attempting to time bottoms?

The usual argument by permabulls involves showing an excel chart or some other fancy graphic that shows how the market has always recovered after large corrections and bear markets. Some claim that there is no need to worry, as the S&P 500 index has stayed below 10% of all-time highs for about 38% of the time. This is true, but there is a problem they rarely address.


While it is true that the market has consistently stayed 10% below all-time highs, as demonstrated in the above chart, it has also consistently stayed below 20% below all-time highs, approximately 18% of the time. Or, in other words, for about a fifth of the time, the market has stayed in bear market territory when we look at the S&P 500 index since 1945. 

More importantly, a careful look at the above chart will reveal that after 2000, the stock market behavior has changed with more erratic moves. We won’t delve into the various reasons in this brief article, but suffice it to say that one of the goals of quantitative easing was to stabilize the equity markets, a goal it achieved, albeit at the expense of escalating public debt.

When the next bear market arrives, as they always do, permabears will celebrate like broken clocks, but permabulls will disappear for a while, and when they are convinced they have identified a bottom, they will reappear, bragging about their long-term records and the benefits of averaging down and pointing to their excel tables and graphs. The audience will mostly consist of “new investors,” because most of the older ones will panic and exit, while some will lose due to unfavorable timing.

Permabears and permabulls are the two extremes to avoid. The former typically have ideological motivations, whereas the latter typically lack risk awareness because it is not their money. I am not surprised that the majority of “do nothing” fund managers in passive index investing are permabulls, earning a fee regardless of the market’s performance. Although I do not see the markets supporting this dynamic going forward, they are running out of “public debt” fuel.

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Disclaimer: No part of the analysis in this blog constitutes a trade recommendation. The past performance of any trading system or methodology is not necessarily indicative of future results. Read the full disclaimer here.

Charting and backtesting program: Amibroker. Data provider: Norgate Data

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