5 Stages of Market Grief

One of the most intriguing things I find about the market is how the collective psyche sometimes resembles a singular entity. In particular, I have been fascinated by the commentary we have heard from some quarters regarding deep and obvious flaws in the present macro environment. I spent a lot of time over the holidays  (skeptically) reading commentary from various pundits. There was something strangely familiar in the absurdly erroneous observations, but I couldn’t place my finger on what it was.

Until Friday. I don’t know who or what actually triggered my memory, but it finally dawned on me what the parallel was: The Kübler-Ross model of 5 stages of grief.

For those of you who never took any psych in college, that is the process by which us humans deal with grief and tragedy. It was introduced by Elisabeth Kübler-Ross in her 1969 book "On Death and Dying". This has become well-known as the "Five Stages of Grief." They are:

1. Denial
2. Anger
3. Bargaining
4. Depression
5. Acceptance

Reviewing recent market commentary, it appears that the investors, traders and pundits alike have been working their way through each of these 5 stages. Consider:

1. Denial: For the longest time, the consensus was that Housing issues wouldn’t impact anything else. Classic denial was demonstrated by the insistence that first Housing, then the credit crunch, was "contained."

There has been a multi-step process for the deniers (denialists?). Initially, they  insisted there was no housing slowdown. Then, any slowdown would not impact consumer spending or the broader economy. The 3rd denial step was that while it was no longer contained, any damage would be mild. The most recent denial was that while the Housing issue has been worse than previously believed, it is now fully reflected in stock prices.

Me thinks they doth protest too much.

We saw the same denial steps in inflation, consumer spending, and job creation. The denial transition went from: a) No slowdown; to b) Slowdown, but no impact; to c) Impact, but contained; to d) Broad impact already reflected in stock prices. 

2. Anger: The details of this were personified by Jim Cramer’s now infamous Fed rant. After spending the prior year discussing that Housing was fine (February 2007), and pointing out each bounce in the home builders (November 2006) was proof the Housing bottom was in, Cramer’s incredible meltdown was stark evidence that the denial stage was over, and the classic anger stage was beginning. 

3. Bargaining: I believe we are now at the bargaining stage. This is reflected in the increased expectations of a 50 bps rate cut (If the Fed cuts aggressively, stocks will be fine). Buying falling knives is a form of bargaining (If I avoid momentum plays and only buy cheap stocks, I’m okay).

Yet another example I’ve been seeing: "Invest Now in Anticipation of Recession Recovery."


What’s next? Well, steps 4 and 5 — Depression and Acceptance — have yet to occur this cycle.

If you were an active investor — or better yet, in the business, recall what your psyche was like in mid-2002. That was Step 4 – depression. The screens were red all day, investors refused to even open up their monthly statements, no one wanted to take your calls. It was fugly. That’s what depression is like.

Step 5 (Acceptance) was when people finally admitted it was over — that stocks had their day. Hope was extinguished, and perhaps real estate or commodities might be a better play. Incidentally, stage 5 is a great time to buy equities. 

If this parallel to Kübler-Ross continues to hold, and if my approximation that we are only at stage 3 is correct —  then we have some downside work to do before this is all over . . .

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  1. Eric Davis commented on Jan 7

    Re: One of the most intriguing things I find about the market is how the collective psyche sometimes resembles a singular entity.

    ever read any Carl Jung? (don’t make me defend all his crazy shit)

  2. dblwyo commented on Jan 7

    Marvelous analogy and mental model – ties together a lot of things I’ve been puzzled by. So much for the data-driven, dispassionate analyst view of the way the Street works. The Buddhists talk about Maya, or the veil of illusion. Most think they are referring to some esoteric mysticism concerning the lack of reality. In fact a fundamental part of their 8-step program for self-help is “Right Thinking” which means a) seeing things as they really are, b) understanding that everything is linked by cause-n-effect chains and c) that our own false beliefs distort our understanding of reality. The veil is our own self-deception.
    Perhaps we need more Buddhist missionaries to the finance community ? :)
    My own take on seeing things as they are, within my limits, is this end-of-year summary FWIW. The part that’s not surfacing yet, in your scheme it would be a new “thing” like housing, is how badly exposed businesses are to a downturn and how critical performance will become.
    We Can See Clearly Now: http://tinyurl.com/ytoo87
    Clear-seeing for ’08: http://tinyurl.com/2py8dz
    Analyzing Performance:http://tinyurl.com/2jqud9

  3. jb commented on Jan 7

    ” ..collective psyche sometimes resembles a singular entity..”

    Sounds like the ” Borg ”

  4. bsneath commented on Jan 7

    “(If the Fed cuts aggressively, stocks will be fine)”

    For all of the blame thrown Greenspan’s way for the subprime debacle, he at least had the seasoning and confidence to take decisive actions when they were needed.

    Now that a recession is in the cards (even Ben Stein appears to think so) I suspect that a Greenspan-led Fed would be cutting rates 50 or more basis points today rather than waiting until the next official meeting of the Fed.

    Bernanke might like to do the same, but as the new kid on the block, he probably does not have the stature as of yet to accomplish this.

    With respect to inflationary concerns keeping the Fed from aggressively lowering rates, there is an excellent piece by Caroline Baum on Bloomberg on why inflation should not be of concern with declining home asset values, anemic money supply growth and tightening bank credit.


  5. Winston Munn commented on Jan 7


    A good observation; however, keep in mind that the “stages of grief” do not always progress in linear fashion. It is not uncommon to bounce around among various stages.

    In my view, a strong rally in the markets from here would be more akin to a bounce back into the “denial” stage – a belief that the Fed can mend all ills.

  6. BG commented on Jan 7

    Excellent post, Barry and spot-on I might add.

  7. Trends I’m Watching commented on Jan 7

    The 5 Stages of Market Grief

    Trend: Denial and anger about the substantial impact of bad subprime mortgages is ending while acceptance is still down the road. This suggests that the downdraft will continue. Barry Ritholtz at The Big Picture describes the process of acknowledging t…

  8. MooPoint commented on Jan 7

    Reminds me of that simpsons episode when homer eats the blowfish and is told he is going to die:

    Dr. H: Well, if there’s one consolation, it’s that you will feel no pain at all
    until some time tomorrow evening, when your heart suddenly explodes.
    Dr. H: Now, a little death anxiety is normal. You can expect to go through
    five stages. The first is denial.
    Homer: No way! Because I’m not dying! [hugs Marge]
    Dr. H: The second is anger.
    Homer: Why you little! [steps towards Dr. H]
    Dr. H: After that comes fear.
    Homer: What’s after fear? What’s after fear? [cringes]
    Dr. H: Bargaining.
    Homer: Doc, you gotta get me out of this! I’ll make it worth your while!
    Dr. H: Finally, acceptance.
    Homer: Well, we all gotta go sometime.
    Dr. H: Mr. Simpson, your progress astounds me.

  9. Scytale commented on Jan 7

    Denier. A denialist would study denial. Thus you are the denialist.

  10. SINGER commented on Jan 7

    Excellent post…

    Not to be a ballbuster,BUT, it looks like “denialist” is proper…

    The American Heritage® Book of English Usage, 1996.

    8. Word Formation: Plurals, Possessives, Affixes, and Compounds

    § 26. -ist

    The suffix -ist, which comes from the Greek suffix -istes, forms agent nouns, that is, nouns that denote someone who does something. Although -ist frequently forms agent nouns from verbs ending in -ize or nouns ending in -ism, it has also come to be combined with words that do not end in -ize or -ism. In fact in some cases -ist can be used much like the suffix -er. In pairs such as conformer/conformist, copier/copyist, and cycler/cyclist, -ist and -er may be used interchangeably.

  11. mhm commented on Jan 7

    bsneath wrote “With respect to inflationary concerns … should not be of concern with declining home asset values, anemic money supply growth and tightening bank credit.”

    It is a bit more complex than that. A good amount of consumer goods are imported and the falling dollar is fueling inflation right now. Another cut will bring even more pressure.

    Remember all the loud cries to break the Yuan/Dollar peg? They are gone… What would happen if everything imported from China would go up in price overnight?

    This “inflation is no concern” talk is Third World economics. The major benefits are collected by the main issuers of debt (government) which sees the huge amount going down in value day after day. Someone with real education in economics could give you more pointers on this topic.

  12. Advsy commented on Jan 7

    A great analogy. Explains a lot.

    Thanks again for making this blog a worthwhile read every day.

  13. cinefoz commented on Jan 7

    Yes, but, as we all know, the stock market is a sure fire, get rich quick, money making scheme. Once the faint of heart have been supplied with an education and cashed out, some new cabel of oracles will describe another can’t lose opportunity. A new group of rubes will buy into it because ‘this time is different’.

    I’m still waiting for the last group of buyers to cash out. I think a few more are still ready to bail. This will be the last wave, I think.

    No aspect of market now has provided enough ‘hope’, to offset the ‘despair’ yet to be fully realized. The bottom has not yet been reached.

  14. michael schumacher commented on Jan 7

    This market is still in denial……because it can’t show any outward appearance of anger.

    Nope these guys will deny it all the way down.

    Haven’t they up to this point already??


  15. cinefoz commented on Jan 7

    To be more specific, I don’t think anything close to a bottom will appear until Brazil, Hong Kong, and South Korea fall to lows that, at least, duplicate recent and significant dips. All appear to be reflective of bubbles. Each appears ready to pop. When? No idea. Soon, I hope.

  16. D.H. commented on Jan 7

    Excellent article. I had forgotten about ‘anger’ and ‘depression’. I have been using a simplified version of: Denial > Tolerance > Acceptance. Under this framework, I think we are at the first inning of tolerating the economy’s negative effects on stocks. However, the masses are not yet ready to tolerate how far and wide negative issues are spreading.

    As you noted, we are definitely not yet in the acceptance stage.

    Thanks for the framework and your cited examples of application. Very useful …

  17. rebound commented on Jan 7


    How long would you guess each of these phases last in terms of weighting? (100% being completion of steps 1-5)

    Denial seems to be a much longer phase than the majority of the other others (The market swooned late February and Early March LAST YEAR on subprime news, but waited until very recently to actually head south as a whole. That was a very long period of denial.)

    Below are a few guesses.

    1. Denial (40%)
    2. Anger (5%)
    3. Bargaining (10%)(There is little one can do for corrective action, but people try and try until …)
    4. Depression (40%)(Numbness sets in as a coping mechanism)
    5. Acceptance (5%)

    I would say that we are just barely entering stage 3 (Bargaining) right now.

  18. Toro commented on Jan 7

    Excellent post.

  19. michael schumacher commented on Jan 7

    money quote of the day:

    “”However, let me be clear: there is no single or simple solution that will undo the excesses of the last few years.”

    -Hank Paulson earlier today

    How this man has ANY credibility left is just too funny.

    “the execeses of the last five years” that you PERSONALLY enriched yourself from.

    What an asshole


  20. comma8 commented on Jan 7

    @ Scytale

    A denialologist is what you’re looking for…

    The -ology suffix denotes “study of.”

  21. Unsympathetic commented on Jan 7

    Br, I think the world is still in denial.. Das estimated that it would take a decade to unwind all the derivatives positions for a reason. We’re still in the first inning. Perhaps the bottom of the first, sure, but just the first inning.

    Why would there be new trumpeting of a “economic stimulus” package if Bush the Lesser had accepted that all his economic plans had failed?

  22. Eric Davis commented on Jan 7

    Perhaps we need more Buddhist missionaries to the finance community ? :)

    One of the Pillars of the buddhism, is to be of service, and do something beneficial with your life,

    Trading worthless pieces of paper, may not qualify. Providing for a stable financial future….. Hmmmm, I just suspect it is just rationalization.

    In other news
    MS: Paulson, I just don’t get why he talks. He has lost any credibility. I guess his time with GS, would wear on anyone’s ability to be “Genuine”.
    But I’m to the point where I feel it’s a waist of time even listening to him.

  23. Peter Davis commented on Jan 7


    These are the very emotions which, as a technical trader, form the basis of my trading. It is my belief that all markets – everywhere, in any time of history – are ultimately governed by emotion. Euphoria, greed, hope, fear and panic are what make markets move. And it is these emotions which manifest themselves in repeatable and predictable patterns. Or, as Richard Dennis once said, “Market change. People don’t.”

    It doesn’t surprise me in the least that the market would seemingly act under a collective emotional state. In fact, this is the very basis of technical analysis. The truth is the market almost always acts collectively – even if the emotion is one of uncertainty. (This gives us choppy markets.)

    A previous poster mentioned the idea of dispassionate, data-driven analysis. I don’t think such a concept exists. We all manipulate data to fit our preconceptions. The best traders and investors simply look at what the market it is telling them, but even these interpretations are subject to our overarching opinions.

    The best strategies allow the trader/investor to look at what the market is telling them and then to act upon that information. Doing so requires a lack of ego (i.e. the need to be right), mental agility and open-mindedness. Those market participant who feel the need to constantly be right (Cramer) are destined to suffer big losses. In Cramer’s case, the failure to accept what is readily evident likely lead to his televised meltdown.

    In this bargaining stage we may be in, there is still a significant amount of denial, as investors still believe that the Fed can bail the market out of some serious problems. This is in total ignorance of the fact that this has never happened before. (The Fed has never been able to stop significant underlying problems, although they seemingly have no problem causing them.)In fact, the last 4 Fed actions (2 rate cuts, 2 special auction announcements) have been met with heavy selling.

    Being objective is difficult, both those who can remain so will reap the rewards in the end. And it is the failure of most people to do just that which gives us that very opportunity.

  24. Michael C. commented on Jan 7

    >>>Step 5 (Acceptance) was when people finally admitted it was over — that stocks had their day. Hope was extinguished, and perhaps real estate or commodities might be a better play. Incidentally, stage 5 is a great time to buy equities.<<< Interestingly enough, that would've been correct as far as real estate and commodities.

  25. michael schumacher commented on Jan 7


    I do not listen to him however that he still has an audience means that someone is listening to him and that, at times, his rhetoric causes real actions in the markets.

    Now is this a case of people buying what he sells??? May be however it’s more likely that the traders will appear to have bought it so that they can get yet another artificially created rally to sell in to.

    My point is that after how many months of saying “it’s okelly-dokely” the administration STILL believes he has anything left at this point.

    And As I type this we are working on taking out the day’s high on yet another artificially created event (fed speak). That is all the perma bulls seem to have left….daily bailouts based on hot-air.

    On a personal note I have had the BEST start to a new year (financially speaking) than I have for several years.


  26. michael schumacher commented on Jan 7

    The major problem with our market (and the people who we rely on for indicators, cough the commerce departmet,cough) tried to get us through all of those stages in one fell swoop.

    We had the Fed going from denial (that it even existed) to Acceptance (that it was all over and in control of the situation that never existed)


  27. Eric Davis commented on Jan 7


    I’m not a big believer in specific events having a “huge” affect on the market, besides adding to the speed of the natural ebb and flow of the market. In fact specific events IMHO lead to more inefficiancies.

    I’d say today more has to do with the idea that we havn’t had an upside move of more than 14 points in the S&P in over a week. And as newton said “action-reaction.”. The tide has to shift to the upside “sometimes”

    Point being, Technicaly, it’s very hard for us to go lower without some distribution.

  28. Keith Harrell commented on Jan 7


    One aspect of the housing market that I haven’t seen addressed in the main stream press is the basic idea of whether rising house prices are really good for the economy as a whole. We read about house prices going up (good) and prices going down (bad). When you think about a house and what happens over time, it really should decline in value, as it gets worn out and has to be updated. What about land? Should land increase in value over time? If we add value to the land, then it should be worth more, but we added a house, so what? Fundamentally it seems to me that rising home values reflect nothing more than inflation. Inflation is bad, right? Nouriel Roubini argues that too much capital stock has been allocated to the housing market. That sounds right to me. We should be investing capital in things that enable our economy to grow. We have been putting too much capital into housing and filling our houses with stuff. Our national economy will only be stronger when we start spending more capital on infrastructure to address our global imbalance of capital flows.

  29. Fred commented on Jan 7

    Is this your “Death of Equities” post?

  30. v commented on Jan 7

    Wow. Incisive analysis piece. You have a high batting average BR, but you crushed this one out of the park.

    And may I add my own philosophically analytical comment here:

    In my opinion, one of the greatest accomplishments of (relatively) free markets is that they have turned mob rule into mob think. It is quite hard for an individual to profit criticizing mob rule; but a whole ‘nother ball game when it comes to mob think.

  31. Kimo commented on Jan 7

    I love this post and the comments…

    but what stage am I in, if I short this market from here to October??? Acceptance??

  32. Pat Gorup commented on Jan 7

    “With respect to inflationary concerns keeping the Fed from aggressively lowering rates, there is an excellent piece by Caroline Baum on Bloomberg on why inflation should not be of concern with declining home asset values, anemic money supply growth and tightening bank credit.”

    –There have been several noted economists who have written articles that lowering rates will not solve any of these problems.

    To recap; lowering rates:
    1) Will not revert “declining home asset values”.
    2) The money supply is hardly “anemic” as it doubles every 5 years.
    3) Won’t influence banks to loosen credit because they are too busy building reserves to deal with writedowns from off balance sheet transactions/assets and they don’t trust each other.

    So, why cut? Oh yeah..so the market can rally again and postpone the inevitable.

  33. DavidB commented on Jan 8


    If you are still following this thread I think these things can be translated into a chart.

    1. Denial

    Charts still are going up and not reacting to bad news

    2. Anger

    Charts start to top out and volatility increases. The volatility is more the sign than the topping as the news is starting to trigger more and more selling yet more buyers try to push the price back into a trend

    3. Bargaining

    The chart begins to turn but you see snap back rallies as shorts pull back to protect capital and bulls ‘buy the dips’. They even call the drops periods where ‘stocks are on sale’

    4. Depression(or recession)

    In all fairness we could also call this the recessionary stage to better align with the markets but this is the point where the rallies get weaker, the volume increases, the news turns negative and the shorts gain their control of the market. The bears pretty much run the trend and the bulls have either run out of money or they refuse to reallocate cash. This leads quickly to….

    5. Acceptance

    Basically ‘stocks are in a freefall’ and buyers can’t be found. Volume has picked up as even the bulls with any money left now become bears. The media is carrying sandwich boards touting the end of the world and government officials are making pronouncements to calm the public while they accept business leaders behind closed doors willing to accept any deal with the devil they request to get jobs created. Again volume reaches its peak. Buyers go on strike and the market is finally allowed to find its mutually agreed upon fair market value of a share somewhere at the bottom

  34. POZ commented on Jan 8

    OK Barry,
    Since you have such depth of insight AND extesive experience in this area I expect a post declaring stage 5 acceptance as having been reached, so we can all invest our devalued dollars.

  35. The Big Picture commented on Jan 8

    Stock Trader’s Alamanac: Uh-Oh

    Dow is off another 180 as I type this, ostensibly on rumors of Countrywide Financial (CFC) bankruptcy. As I noted in May 2005, while sitting next to Angelo Mozila on Larry’s show, I wanted nothing to do with the long side of that company. However, I do…

  36. zee ….. http://z-stock.blogspot.com/ commented on Jan 18

    DOW at 11,200—now that’s what i call acceptance—-
    coming to a theatre in your neighborhood—soon—

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