The double bottom shakeout!
Updated: Mar 7, 2021
One of the things to be aware of for the risk management investors of the shakeout; specifically the double bottom shakeout. Since the 2008 crisis, there have been a lot of trading programs and subscription services that aim to avoid market crashes and they have largely been getting shaken out by fake crashes. Ever since the government began pumping money into the economy in 2008, the markets have soared and there hasn't been a need for risk management since because all the market is doing is mostly going up. Having used and seen risk managers only available to institutions and having been whiplashed time and time again, I have personally experienced the double bottom shakeout. Worse yet if you try to short during a double bottom shakeout. Essentially a lot of these subscription services tell you to get into cash or short the SP500 (e.g. SH). Every 10% drop that has happened since the 2008 crash has been short lived and false. But the risk signals job is to avoid market crashes. So these fancy algorithms would trigger a move to cash or short the market in an attempt to make money by avoiding losses.
In the first yellow box the SP500 has a bottom where it goes down in value and then shoots back up in price. On the second bottom, is when the algorithms trigger that a crash is coming. So you get out and wait until your system or advisor tells you to get back in the market. You get out after losing 10% only to miss out on another 10% of returns, so you are essentially locking in a 10% loss. The person who ignored the downturn didn't lose any money since they got the rebound when the market went back up 10% in a matter of weeks.