Wednesday, July 26, 2017

Blood of the Bears

The financial markets are built on blood.  After a long bull market, the blood of the beaten down bears is used to feed the next bear market.  And vice versa after a long bear market.

The early bears' pain is the timely bears' gain.  It is difficult to time the top of a market, much more difficult than timing the bottom.  One of the early signs is when the markets go from pricing in better fundamentals to just valuation/multiple expansion.  This phase of the cycle can last quite a while, which is why it is an early sign.  It is a basic ingredient for the next phase, which is the topping phase.
The tricky part about the topping phase is that sentiment actually gets a bit less bullish while prices chop around.  This can fool the contrarian into thinking that there is still a wall of worry to climb, when in fact the wall of worry is blocking higher prices.  There are nuances to this game which makes it so important to develop feel and intuition when trying to predict future price moves.

I hear cliches from traders about "trade what you see, not what you think".  Like many cliches, they have a kernel of truth, wrapped around a lot of myth.  Yes, it is true that if you hate Trump, then you would think the US stock market rally post election is irrational, so not trading what you think would be a good thing.

But if you aren't thinking about the future and only focused on the present price action, that is a recipe for chasing and getting chopped up.  A quote from someone before he became a bloated macro hedge fund asset gatherer, when he was a great trader who made spectacular returns trading macro in the 80s and 90s:

“I believe the very best money is made at the market turns. Everyone says you get killed trying to pick tops and bottoms and you make all your money by playing the trend in the middle. Well for twelve years I have been missing the meat in the middle but I have made a lot of money at tops and bottoms.” - PTJ

It feels like a market turn is coming soon.  Since we haven't topped out yet and are still making new highs, it is speculative at this point.  But I am looking at the next few weeks where ECB tapering, Fed balance sheet reduction, and debt ceiling are on the horizon.  Those should be bear catalysts.


Anonymous said...

When are you covering your short?

Market Owl said...

I'd like to wait for a pullback down towards 2420 or get out if SPX goes to 2510. Looking to hold the short from 2-4 weeks.