I want to know what history has to say about the future developments in the different areas of the market in case I am correct. When it´s too late to increase already existing short exposure (since a few weeks I am short all Mag 7 apart from Apple, but am hesitant to increase that as I´d have to pay now much more to buy more of those puts)? What areas will go down fastest and furthest (The most hyped ones probably)?

Etc. etc. All I know is what Jim said about recovery afterwards, that the worst stocks recovers first (What are the worst then? The Mag 7, as they then would have performed worst?).


For the first part of your question, I have no idea. I think the answer is that every case is different, but if you are looking for how major corrections start, and trying find some pattern, I personally believe this is the wrong way of thinking about it. What we should be doing, IMO, is to examine moments when conditions looked like right now, and determine what it was best to do, in retrospect. For instance, at moments when the markets were trading at high multiples (say over 25x earnings), but had dipped 10% 1-2 months after their most recent peak (almost there now with the S&P 500 down from 7002 to 6374), in how many cases did markets go on to dip significantly further, 2 months later, versus bottoming out and recovering?

As for the second question, the worst stocks that seem to recover most dramatically are the risky ones that looked like they might go out of business, and these stocks obviously drop the most, but as the economy/stock market recovers, they also recover most strongly. I would say these are NOT the kind of Mag7 stocks that all look like great companies but are just trading at kind of high multiples of very high (perhaps temporarily high) earnings.

Regards, DTB