Monday, January 25, 2016

Bear Time

The bears have gotten beaten up so badly over the past 7 years, that you have to wonder if there are any left with REAL money.  Sure you have the permabears that will always exist because they live to be negative, not to make money.  But the market moves based on the actions of those with money, not those who are loud.  And despite the low number of bulls in the sentiment surveys, I am not seeing the same extremes in VIX, put/call ratios, and money flows as during the August dip.

Moreover, what you are seeing is a broadening out of the selloff to include more sectors, leaving behind just a few leaders to keep the indexes afloat, masking the damage underneath.  Just from a psychological standpoint, most money managers who wanted to buy stocks lower have been able to do so over the past few weeks, in a greater number of stocks than they were able to do in August and September.  If the eager dip buyers are already satiated, the only remaining big buyers remain corporations and deep value investors.  We are still in the bulk of corporate buyback blackout period, so the bears still have some time to operate (about 1 to 2 more weeks), and we are nowhere even close to deep value territory.

If you are going to call yourself a bear, you have to make money during this time period.  This is about as good a market to short as you have seen since 2008.  The bears usually have much less time to shine as bear markets die much quicker than bull markets.  So bears have to feed when there is lots to eat, before the next hibernation cycle.  There still a lot of time in this down cycle, but this month was the first blatant sign that told you:  get more aggressive on the short side and have less respect for V bounces.

We are finally at the first favorable risk/reward spot for shorting since the start of the year.  It is hard to find these spots on the way down because you have to give the bounce a couple of days to work higher to avoid any V spikes to the heart.  We never got that until today.  So we finally got that 2 day bounce to higher levels, with bulls getting more confident again, at least short term.  You take this short here, along with an oil short, and ride it down with a target to the midpoint of the 100 ES point rebound (1804 to 1906), which is ES 1855, and oil towards 29.00.

Those lows from last week are safe for the next couple of weeks, so you can buy weakness now without fear of the market plunging.  But that bull grace period will not last for long.  You have err on the side of caution when holding longs and sell earlier than you would, because these are bear market conditions.  Likewise, you have to be earlier in shorting bounces, as they will not last as long and will not go as high as those during the 2009-2015 time period.

It's a new ballgame, and those bears who are still alive and remember how they made money in previous weak markets will thrive here.  They have suffered so badly over the years that only the most resilient and those with the most conviction will succeed here.  They never make it easy for bears to make money.  But since there are so few money managers that are naturally bearish, some great opportunities can arise to sell strength during those hope-filled rallies.

If you are not a bear, just turtle up and stay in cash until you see big dips like you saw last week.  It is now a time for bears to be actively looking for opportunities to strike on the short side.  Finally.

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