Monday, October 26, 2015

Scars from 2008

"It is not what I think that is important, it is what others are thinking that is important."

It is still there.  The memories of 2008 die hard.  For most in the investment community, avoiding being caught long in a 2008 style crash makes most overly bearish when you get a steep drop like you did in August and again in September on the retest.   This creates a market that goes into disequilibrium even though fundamentals have not changed much.  Nothing drastic happened from August 18 to August 25 to make the market drop 230 SPX points.   It was not as if China suddenly had a crisis.  It was just the fear of another 2008 that caused the selling.  As a trader, I have no fears of a 2008, because that was probably the best trading year I ever had.  In fact, I would love to be able to trade a market like 2008 again.

It is still stunning to me to see people so bearish on these big dips, because they have been such great buying opportunities for 6 years straight!  It is hard for me to understand, but it must be the scars of 2008 which run so deep that they emotionally trump the past 6 years of raging bull market action.   It is not what I think that is important, it is what others are thinking that is important.  I am not the one driving the stock market, it is the institutions and the collective psychology of the masses moving it.

For me, the biggest scars came in 2010 and 2011, when my excessive bearishness and chasing losses hurt me big time.  Unlike Twitter traders, I will admit my past defeats.  That is a part of the game that trading vendors and gurus gloss over.  If you don't study your defeats, you will repeat them.  Even if you study them, you are likely to repeat the same mistakes until you take them seriously and not just say its bad luck.  That is why I didn't fall into the trap of shorting the right side of the V this month, because I remember getting face ripped in the same situation in 2010, 2011, 2012, and 2013.  I was so hard headed and am such a natural bear, that it took 4 years of horrendous ES shorting losses before I adjusted.  Those adjustments, such as going long bonds as a substitute for shorting stocks has paid off over the past two years.

So what about the current situation?  With the kind of disequilbrium that we were in by late September, without a bearish fundamental change, the market could only go back up to where it was before the dislocation, and that is SPX 2080.  You can even argue that the current market is even more bullish than before the big drop.  We've  got a more dovish Fed, an ECB more committed to QE, and China easing more aggressively.  That easily trumps a slightly weaker credit market.

Now, we are back near 2080.  I initially thought I would love to short this level, but after reviewing what happened in 2014, and with the current investor positioning, it isn't so attractive as I once thought.  We will probably get a 2-3 day pullback after the Fed meeting in a sell the news reaction.  Beyond that, I would still rather buy weakness than sell strength.


Anonymous said...

What's the deal with natural gas? Going down because of crude or el nino?

Market Owl said...

Neither. Seasonally weak time for nat gas plus too much supply from frackers. Crude is irrelevant for nat gas.