16 Responses to “Scaredy bears”

1. Axclr8
   August 7th, 2009 at 4:54 pm

   

   A lot of technicians are expecting exactly that … down to 950 and then resume upward. I still stand by the fact that I think this is market is going much higher … I perfer to bet on stupidity and irrational behaviour vs. being prudent … the dumb money vs. the smart money ….

2. Aki_Izayoi
   August 7th, 2009 at 9:20 pm

   

   I am surprised that the bond market bought this as there was a rise in Treasury yields.

   I posted this earlier (7/20/09) and it seems that the conditions are satisfied:

   I suppose the actually bear market rally is about to end; it will end when:

   1. Traders with short term time horizons are actually going long for short term gains.

   2. People (”smart” money who supposedly have long-term time horizons) actually believe in an economic recovery AND believe that asset prices (or cash flow from these assets) will benefit from the “recovery.”

   3. Idiots who buy stocks expecting long-term return and have no understanding of the long-term fundamentals or short-term technicals. [There is evidence for this in mutual fund inflows.]

   During March and April people were defensive and calling it a short-covering rally, a dead cat bounce, and bear market rally. These terms seemed to have disappeared from the lexicon. Now if those three groups are bullish, one could exploit the short term time horizon of the traders, the irrational exuberance of the long term investors, and the stupidity and ignorance of the latter group for a nice short position with an excellent risk/reward profile. Many bears might join the one of the three groups, and those bears with perseverance are the ones that will prosper.

3. Axclr8
   August 7th, 2009 at 11:56 pm

   

   Having lived though these kind of rallys multiple times since the crash of 1987, 1997, 2000 and 2009 … and many times I had short positions .. I will not forget that training / gut wrenching moves … but every time the markets did change and go down …. an extreme of irraitionaility has to be achieved before that happens … we are not there yet. This rally is simply the revenge of the bulls for what happend to them through 2008 … I draw this analogy, think of the market as ping pong ball, the higher point it drops from, the higher the rebound and then it goes back down again but every time the hight of the rebound is less ..untill it just does not have enough energy … that’s a true bottom … we have had the first rebound and after such a hard fall, this kind of rebound is rational in a irrational way. This market moves hard into the Dow 11000, S&P 1100, Naz 2300 level easily .. heck, we were at Naz 1750 in July 10th!! 250 points in a few weeks … why not another 250 points into mid Sept …. ah then, is the time for the Bear to come back and send the Bulls into a cold winter …

4. Mike
   August 8th, 2009 at 1:29 am

   

   The difference, Axlr8, is that we are in hard-core deflation for the first time since the 1930s, which means you can rule out comparisons to 1987 and 1997, and our deflation is much more severe than Japan’s.

   Aki, I’d forgotten about that post — very nice projection of current conditions. What would make you change your opinion of the situation? For me, I guess it would be a dollar that fails to rally more, commodities that fail to fall, continued weak bonds, and continued tight credit spreads, or a stock rally on high volume and breadth.

5. Mike
   August 8th, 2009 at 5:00 am

   

   I made this long comment on the last post in response to a troll. I know it’s bad policy to reply to these guys, but for better or worse, it prompted some Saturday morning rumination:

   “Given your disrespect you don’t deserve a reply, and are no longer welcome here unless you’re more polite and start making some actual contributions to this blog.

   Regular readers know that I’m fine with other points of view, but not rudeness — for instance I have a lot of respect for some posters with whom I have very different political views. However, the above comments did prompt me to ruminate over the last few months of trading. So, mostly for my own benefit, here is a kind of recap:

   The reflation trade was a good short when I posted on it at the end of May and first week of June. It was vindicated with a nice fall from there into the first week of July, but has since revived and is setting up an even better short (since there are internal divergences and because guys like the above poster are now so confident). Anyone who was short stocks, copper, oil, silver and went long bonds and the dollar from early June did very well (every asset named here did what I predicted). Since then, the strength of the recovery in commodities and the new lows in the dollar have surprised me, but that’s what stops are for. Bonds and precious metals have not breached their June levels, a somewhat promising divergence.

   The bond long from early June was a particularly good trade, as bonds rallied nicely from exactly when I made the call to sell TBT and buy TLT (the day the 10-year touched 4.00%). I made very nice gains on my calls and 10-year notes. Bonds have retraced much of that rally, but holders of TBT are still down about 7%. That was one trade that actually worked out perfectly for me, since I went long the bottom, sold at the top, and sat on the sidelines until last week.

   Gold and silver were a real bitch in January, but despite the “money printing” bonanza, they have not made new highs like almost everyone expected. They went on to present great shorting opportunities in Feb and June (very high bullish survey readings), which I noted at the time, and they are again good shorts at these lower highs this month. Gold will likely disappoint for a long time, because of this failure to break above its level of 18 months ago in the face of a gold bug’s dream set of fundamentals (also because silver, platinum, paladium and base metals have made very weak runs relative to their 2008 highs). $600 is still not out of the question.

   I don’t claim to be a trading wizard (I’m much better at making intermediate-to-longer term calls than at the short-term mechanics of entering and exiting trades on those calls). I have no problem admitting to my mistakes, thank god, since there are a lot of them. I totally screwed up what should have been an epic silver short from June to July, shorting at 15.65 but covering at 13.90 and leaving big gains on the table, when a simple trailing stop would have been far better. I also went long silver with only a small position at 12.45 (2 ticks from the low) but wimped out again at 13.20 (again, a trailing stop would have given me another two bucks). Taken from when I turned bearish, to bullish to bearish again, silver should have been $5 or $6 in gains, and as good a set-up as it was, I should have taken larger positions — but making good calls is different from making good trades. Trading is my big weakness — give my calls to a good trader, and I’d be a far wealthier man.

   Copper has been equally frustrating, stopping me out flat after falling from 2.30 to 2.10, and again denying me an entry a few days ago when I tried to short it at about 2.62. Ditto oil last week, with multiple stop-outs there. Not to mention hogs — my bottom-picking attempt in June didn’t work out, though I’m even more interested now.

   I noted here that I was long the 10 year note last week at 95.12 — well, I booked nice gains on some calls from 1 20/64 to 2 2/64, selling at the top at the end of the week. I bought them again this week at 1 20/64 but was stopped out Friday at 1.

   Actually, it’s funny — the trades JB mentions were among the few highlights of the last few months. They were all solid calls. I wish I had stuck to them and been more patient about shorting crap like restaurants and retailers that just kept going up, and waited until at least late May to start buying back my long-term SPY puts (though I bought very few until June, and have only in the past couple of weeks built it into a large position).

   I guess my lesson should be to stick to trading the high-probability macro waves — it is easier to gauge mood and trend on large asset classes than in particular stocks. And when you see readings like single digit bulls or bears and charts with clear levels for stops, have the guts to take a large position so that your calls make you good money for all your work.

   Actually, that brings up a sort of rule for myself: if you are not confident enough in a trade to blog about it, don’t take it. I didn’t post about about all the losing stock trades I entered last spring (I only mentioned them in passing comments) — that should have been a hint that I didn’t have much to back them up.

6. Axclr8
   August 8th, 2009 at 4:55 pm

   

   From other sources on the net

   Bear Markets have three Stages:

   A: Sharp Down

   B: followed by Reflexive Rebound

   C: then a Drawn-out Fundamental Downtrend

   http://2.bp.blogspot.com/_nSTO-vZpSgc/Sn21Jea96rI/AAAAAAAAGmo/g_mNH-Hz4gg/s1600-h/bear+market+stages.png

   I think part C will not start untill early 2010 though

   Nice video from D. Rosenberg:

7. Axclr8
   August 8th, 2009 at 5:01 pm

   

   Missed this from last post:

   http://www.cnbc.com/id/32315896

8. Mike
   August 8th, 2009 at 5:22 pm

   

   Poor AJC — she’s looking a little worse for wear these days. Like CNBC says, she’s widely-followed alright, but not for the reasons an uninformed reader might assume. For newbies, Abby Joseph Cohen has got to be at the top of any trader’s list of contrary indicators, with a nearly perfect record at getting it hugely wrong at just the right times. Stupid, sinister or both, I don’t know for sure, though she does work for Goldman.

9. Mike
   August 8th, 2009 at 5:42 pm

   

   OK, I take it back about AJC. She’s not such a great contrary indicator, since she always gives the same reading, if wikipedia is to be believed: http://en.wikipedia.org/wiki/Abby_Joseph_Cohen

   That makes her about completely worthless.

10. Aki_Izayoi
    August 8th, 2009 at 11:13 pm

    

    “Aki, I’d forgotten about that post — very nice projection of current conditions. What would make you change your opinion of the situation? For me, I guess it would be a dollar that fails to rally more, commodities that fail to fall, continued weak bonds, and continued tight credit spreads, or a stock rally on high volume and breadth.”

    I do not think anything would change my outlook in the near term… sentiment feels toppish, but I am inexperienced. I did not pay any attention to the market in March 2002. I cannot say that this is a repeat of that situation. However, some contrary evidence comes from Ned Davis who said that the sell-offs happen when more people are even more optimistic. (The Treasury sell-off in late 2008 and 2009 didn’t happen when people were bullish on Treasuries though; it happened when the Treasury bears capitulated.) Also, he notes that investment grade bond yields have to rise in order to spark a sell-off, and that the P/E has to approach 20 (which according to Davis, this hasn’t happened.)

    Regarding the 2002 peak, Robertson Morrow said:

    ” In mid-2001, as recession hit, the stock market wobbled. From April to September, the S&P 500 fell 30%, but September 11th masked the downturn. Easy victory in Afghanistan and no further acts of mass terrorism reassured Americans. By March 2002, most believed that we had conquered the recession. Magazines and newspapers headlined the triumph, and the Dow reached almost 10,600, just 10% off its January 2000 peak. But the victory was an illusion based on foreign money. In April 2002, the dollar began to break, falling more than 15% in four months, and the stock market followed the dollar down. By July 2002, the market had lost almost 30%, and Americans began to turn pessimistic. The late bubble was over.”

    The recession hasn’t been conquered though. But Robertson Morrow has been very insightful and his helped his boss’ hedge fund achieve outstanding returns although his boss fucked up when he put his money where his mouth is when he asserted earlier that Google and over tech companies were “undervalued.”

    Mike, if you haven’t click on “fucked up” do it; that is a nice dictionary entry for that phrase.

11. Aki_Izayoi
    August 8th, 2009 at 11:45 pm

    

    This table and the table here also confirm Davis’ P/E of 20. The peak P/E in 1937-38 was 22 and in 1930 was 25.8. However, during 1916 -1922 bear market, valuation did not approach though levels. NB: Clarium shorted the bear market rally too early and their performance reflects that but it is still my favorite hedge fund.

    However, I do not know how equities were valued then and now. I do not know if headline P/Es are relevant now. Do those tables use “as reported” earnings now, or just bottom-up “operating earnings”?

    Again, with sentiment, most people do not believe that recession (or depression) has been conquered.

12. Axclr8
    August 9th, 2009 at 12:41 am

    

    Shit, suppose she is right this time Mike? Can you imagine, a lifetime of wrong calls …. and then suddenly she get’s one right. I don’t know, the more I look at the charts the more I get nervous … burnt out today so I could not do any real work … will be more diligent tommorw and come up with some real stuff … anyways, Prechter’s super bearish again saying the markets are ready to turn over …. sorry, the guys was bearish was for so long and then finally things turned after 4 years of his bearish calls … heck, he’s in the newsletter business, so it’s all Marketing …

13. Graphite
    August 9th, 2009 at 2:56 pm

    

    People keep saying “Prechter was bearish for so long” as though that was the wrong perspective for him to hold. But short-term cash equivalents have outperformed the stock market for, what, the past 12 or 13 years now? Okay, there was an opportunity cost in failing to play the final credit-driven run to Dow 14,000, but in terms of the kind of multi-decade, high degree turns that Prechter is attempting to call, I don’t think being four or five years early should result in instant disqualification of every subsequent forecast.

14. Mike
    August 9th, 2009 at 3:07 pm

    

    Yeah, and the guy has made great contributions to technical analysis and the psychology of markets during his career. Nobody has a perfect record, and anyone who calls Prechter dishonest clearly hasn’t read him.

15. Axclr8
    August 9th, 2009 at 9:07 pm

    

    Clarification: Did not mean any disrespect to Prechter, but I am only pointing out that sometimes these guys in the Newsletter business have to run a “business” and lure people in. Precheter made a great call to his subsribers in March to go long. Market timing is extremely difficult but it is investors who do not due enough due dilligence when gambling with their money and follow anyone with a great marketing ad or background. And for sure, cash was the best alternative the past 6 years. I follow the work of Bill Fleckenstein. He has exited and closed his short only fund back in November. At the moment I think the economies of the BRIC’s are driving the Western economies higher. However, the Shaghai Index has reached 3000. This is a crucial level. If this level can hold, it’s onwards to 4000 … and drag the Western Indices along another 25% … why not invest in S&P stocks that have more that 50% of their earnings from the East … where the money and stimulus is the most.

    During the past 110 years the US has gone through a series of Economic Cycles which has been reflected in the stock market. If we compare the Historical PE Ratio to the Inflation Adjusted Chart of the S&P Composite a few things standout. First each Cyclical Bear Market has not bottomed until the PE Ratio has dropped below a value of 7. This occurred in 1982, 1932 and even further back in 1921. Currently the PE Ratio is like 100+ so if history repeats itself then it would have to drop back to around 7 before a bottom would occur. Meanwhile if we compare the charts of the “3″ previous Cyclical Bear Markets to the most recent one the overall pattern looks similar to that of 1968-1982 and 1906-1921. Both of these Cyclical Bear Markets were drawn out affairs in which the S&P Composite took the form of an elongated ABC type corrective pattern that lasted from 14 to 15 years. When you breakdown the 1906-1921 and 1966-1982 time periods what’s amazing is that after completing their “B” Waves it took 9 years for both of them to complete their elongated “C” Waves. Now if we look at the current Cyclical Bear Market a similar ABC type corrective pattern appears to be developing as the “B” Wave completed in late 2007. Meanwhile if we compare the 1968-1982 time period to the current pattern it appears we are basically in the same spot as we were in the mid 1970’s in which the S&P Composite had a decent rally from 1975 through the early part of 1976 before going through an extended downtrend which finally bottomed in 1982 as the “C” Wave ended.

    Sept / Oct can bring a 10% to 15% correction but I think after that we move higher into Q1 2010 …

16. Mike
    August 10th, 2009 at 1:28 am

    

    The 06 - 21 and 68 - 82 secular bears occurred during inflationary times when earnings grew to catch up with stock valuations.

    I think deflation today hangs a very heavy weight around equity prices. At any rate, it should not take long to find out what kind of a bear market this is going to be.