Public perception in stages of a bubble

The common narratives seen through asset rises and falls

This was first written and published in mid 2021. We’d just seen the first 50% BTC drop and this post was written with the proposition that the public attitudes definable in the public regarding crypto would also duplicate itself onto the meme stocks and then into the blue chips/indices.

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I believe bubbles and the breaking of them can be broken down into different sections as charting moves and alongside this, I think there's always a very common thread of narrative that runs through the bullish and public perception of the bubble and pop of it in different stages. I've found this to be true in the charts and in my observations of people during bubbles.

Stage 1 - The up

During stage one there is no bubble. Everyone knows the idea is risky and dumb and the people who are enthusiasts in stage one are mocked if they are not quiet. Phase one usually has shroud market players and people really passionate about the asset in question. It's not popular. Not a "Socially acceptable" asset. Any of the big advances in it as this time as viewed as a fad.

Stage 2 - The advance

The advance period begins usually after a period of the market ranging for a while but can also come off a gentle slow uptrend. In the advance stage the movement of price changes dramatically. The slope of the chart takes on a much sharper angle. There are not ups and downs; there are big ups, sideways moves and more big ups. Late in the advance attention is drawn to the asset.

Stage 3 - The water's cold

The advance changes the public perception. More people are now willing to speculate in the asset since it has made such impressive gains over the last short while with so few pullbacks. This is still considered speculative but more early speculators are ready to take a shot at it. This will quickly turn into a stuttering high and there will be a crash. Often there will be a recovery from the crash and then a second crash off the same sort of price. Everyone knows the asset is dumb again. We're back to it being the shroud people that buy low and the passionate people who hold faithfully.

Stage 4 - The boom and re-boom

Before stage 4 starts the market will have action similar to stage 1 and 2. Out of some sort of range or slower move will come a strong advance. The advance is really strong, and obviously so, but people are cautions after seeing people dip a toe in and drown the last time. The asset starts to gain multiples doubling and tripling but still getting a sceptical eye from the average guy.

Stage 5 - The convincers

After the move has gained 300 - 350% people just can't ignore it. It's on the news, "Asset silences critics again as it shoots through the important price". Everyone is talking about it. You can not find a single person who bought it and lost money. It must be time for you to dip your toes into this. You're missing out! Just think about where it will be in two years at this rate!

Stage 6 - It's still a bit cold

Around about the time the asset is starting to gain public acceptance and not being so summarily dismissed when brought up for conversation more people are getting in. Here there's usually another dump. It's not as bad as the earlier one. Somewhere in the 10 - 20% range. It's uncomfortable but most people hold through it and the market then starts to make strong rallies into a new high.

Stage 7 - Everyone's a winner

After stage 6 the market has become more dangerous. It becomes a much more regular feature for the market to have sharp drops. It is still technically up trending because it does make new highs. And it does still have that feeling of a mega trend because when it does go up it's doing it quickly. But now there are vicious moves down. Ones that were not there in the boom and re-boom stage that attracted everyone's attention in the first place.

But now everyone has their winner story. There are the hardened vets. People who can tell you their war stories of how they've rode the dips and there's the stories of those who sold their assets into the low and will forever live with the regret of that. By now it's firmly established the smart public should be buying the dips. This is always going up. Someone will say moon. Someone always says moon.

Stage 8 - The rush of euphoria

A huge and fast move up is made in the market. Usually it's about a 25% jump from the previous high and sometimes this will have come off an extremely vicious move down. The move up is the strongest move anyone has ever seen. When coming off a strong down move it's seen as the ultimate validation that the mega trend is forever. At the end of stage 8 is where most of the public money goes in.

Stage 9 - The subtle pop

After the rush of wildness in stage 8 the market will break. This break will be an obvious break but everyone has their war stories and ringing out around the place will be the mantra of buy the dip. No longer is it questioned if this will make a new all time high. It's only a matter of when. During the subtle pop you'll see a lot of things like people telling others to remove their stop losses. Frantic cries to "Avoid selling at all costs!". People will push hard the fear of missing out if you even consider closing. There's all the other times! They’re remind you of the convincers.

Stage 10 - The public trap

From stage 9 it will start to look like stages 1 and 2 are repeating. People ignored the signs of stages 1 and 2 before but now everyone is eager to point them out. Everyone knows how to follow the uptrend late in the uptrend. They've started to assume implied floors and predictable new highs, and as soon as the market rallies in ways to confirm that they'll happy load up their positions into when will end up being the upper fifth of the move.

Stage 11 - The rug pull.

The rug pull will come with some news. I can't think of any example ever of there being the rug pull break without some news. The move in the market will obviously not be the dips of before but the fact that there's a new story will feed the mantras of it being only a flash in the pan news. Ignore the FUD. Those sorts of things. But the market does keep going down.

Stage 12 - The early panic

Somewhere around 50% down the market drop is getting ready to end for now but there's going to be a really strong move down before that. Usually this is bad news. Something to make it obvious to everyone this is terrible. The price drop will become faster than ever. People assume that will mean bigger than ever and panic sell. This is often around the low.

Stage 13 - Mimic the convincers

The market has been down substantially after a hyper parabolic move up, the odds of it going lower are very high but by now the public has been trained to buy the dip. Especially if the dip starts to do things similar to stages 1 and 2 again and makes people think this is just another one of those falls we've seen before.

At this point people often make lifechanging decisions! This is the time when it's most important to be able to warn people about the bubble but the time it is hardest to. Bears have always been wrong always and no one could have predicted the rug pull because it was news. The news is getting better and people start to make decisions to put themselves all in to the markets. They liked it at the high so they should love it now.

Stage 14 - Lower lows and lower highs zig zag.

The market will start to move down but it's no longer in the rug pull style drop of capitulation. it's into a zig zagging drop where it makes a new low but then has a fierce bear market rally. The lows are always lower and the rallies never come higher than the previous ones but coupled with the belief a new high is inevitable more and more people will start to risk more than they ever thought they would have - if they have anything left to risk. Others will have booms or hope and busts of panic into ups and down.

Stage 15 - The kick out.

After moving lower like this for a while (And during this move lower there can be multiple rallies of at least 25% - there are a lot of huge buy trades in a bear market - but overall the market is losing value. And then we enter into a second capitulation phase. It's again caused by news and it's the same hellish price action as before. By this time the mantras have quietened down. Not as many people want to cheerlead all in risk. They themselves might be down a lot and any aware person would have to be aware this mania thinking in previous stages must have led people to life changing losses. Most people want out now and if you don't want out you probably opt to be more quiet about it, just in case.

This is where most people will exit at the low. There will be bad news. It will be the worst news so far. The bad news will make the low.

In most asset bubbles (For example the recent BTC drop) more money is lost during the stages of the rug pull and capitulation period than is made in the full way up. Everything that is accumulated on the way up can be simply passed over to other market players in a tenth of the time during the breaking of the bubble. And this is how paper profits become real losses.

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Reposting this here now because I believe there is a strong possibility we’ve entered into the “Subtle pop” stage in US indices.

We’ve got all the markers of the “Everyone’s a winner” and “Euphoria” stages through from 2018 to the current date (8 June, 2022).

The market is now currently in a decline that few people believe to be a real top. This model would now forecast we’re soon to see a rug pull, usually news supported.