Tuesday, January 12, 2016

More Like Bear than Bull

I see many still debating whether we are in a bull market or a bear market.  Everyone wants a clean and neat description for this market.  I can only compare what I see now from what I have experienced over the past 20 years of trading.  And this market is more like a bear market than a bull market.   Beyond those 20 years, I can only look at past prices and charts, with no idea about the fundamental news, sentiment, or overriding themes of those times.

If you count from the mid 1990s, we had bear markets in 2000-2002, and 2008-2009.  Well, is not as bearish as either of those markets.  Those were absolute bull killers.  But it is not as bullish as anything else from 1996 to now.  So you could call it a bearish consolidation, but not a bear market like we've seen after the past 2 bubbles.

In any case, you cannot treat the market like you did in 2010, or 2011, or 2012, or 2013, or 2014, or 2015.  This market is much more bearish than any of those markets.  Since most traders have a recency bias, they either trade as if it is BTFD, QE4ever mode or 2008 mode.  This is neither.  It is in between, but more like 2008 than the raging BTFD markets of the past 6 years.

So what is the game plan for this type of market?  It is to treat it like early 2008, but with a more bullish lean.  The crowd is getting quite bearish despite the fact that we're above those August lows, and that tells you that the amount of time left in this selloff is limited.

If we were below those August lows, I would be more interested in picking bottoms because there would be more value, and better risk/reward ratio, but you have to trade what you see.  I see a market looking to flush out as many equity holders as possible until the bulk of earnings season starts next week.  That could take us to SPX 1870, or even as low as 1825, if the crowd really panics.

After this selloff, we should bottom and have a face ripping counter trend rally that should take us to 1980.  But unlike August/September, I don't expect us to keep ripping higher to 2100, but expect a bearish consolidation near new lower levels which will set up another drop later on in the year.

For today, I expect a bounce to suck in the optimists and short term bounce players, only to set up a skull crushing move lower down to 1870 later this week.   That is the gameplan.

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