Lizard Brain

Trading is such a mental game.  Its something I didn't really think about until the past few years when I realized I would have these long losing streaks and also long winning streaks.  It was because I was doing stupid things when I was losing money.  I would get desperate to quickly make back my losses.  Forcing trades.  Rushing to make it back.  In the process, I would take mediocre trades, get in too early.   I would dig the hole a little deeper.  It was a self-reinforcing cycle of losses leading to more losses.  A trading hamster wheel in hell. 

Only after a big win would I be able to stop that vicious losing cycle.  Why do we do this to ourselves?  Its that lizard brain that lingers after millions of years of human evolution that hates losing and wants to make that feeling go away, as soon as possible.  

Another remnant of that lizard brain is the desire to follow the herd.  It has less to do with getting more bullish when things go up and bearish when things go down, and more to do with following what others are doing.  Its like following the latest fashion trend, the latest fad.  Monkey see, monkey do.  Going on Twitter, watching CNBC and Bloomberg, and thinking that those guests and hosts know what they are talking about.  But its quite the opposite. In finance, those that know the most talk the least. 

How about that other thing we have in common with our ancient ancestors.  Recency bias.  How soon that we forget Powell's forward guidance in 2021, when he said he  wouldn't hike until 2024.  Now we believe his every word, taking it as gospel, that he will keep hiking the US economy into a depression!  I am old enough to remember when all the talk was about secular stagnation, deflation, and the worry that robots were taking away jobs.  Now we can't seem to find enough workers.

The financial markets are still stuck in that recency bias of believing that stocks always goes right back up.  Its that buy the dip mentality, the stocks for the long run crowd who believe that its their god given right to have 11% annualized returns, without a thought as to where that return will come from.  Valuations are an afterthought, its just about staying invested, dollar cost averaging, and investing for the long run.  A lot of bad habits and erroneous assumptions have been built based on the backs of the 2 biggest bull markets (1987 to 2000, 2009 to 2022) in recent history.  The stats nerds lap up every dip like its a lifetime buying opportunity, a guaranteed way to make money. 

Its that American Exceptionalism creeping in.  It assumes that the US will always be the best place to invest, the best currency, the cleanest dirty shirt, the best house in a bad neighborhood, etc.  All I see is a US that is becoming more of a bureaucratic country like Europe, that relies on fiscal policy to boost economic growth, with very little organic growth.  Productivity that is going down as the public sector gets bigger along with the ballooning budget deficits.  A country that has no vision, that just tries to throw money at problems with no scientific or logical plan for energy, healthcare, infrastructure, etc. 

Over the next 10 years, I can see a US stock market that goes sideways with 0% return, as the cost of both goods and services goes much higher, mainly from populist inflationary fiscal policy that aims to throw money at problems instead of looking for long term solutions to a lack of energy, labor, and productivity growth.  I can see financial repression coming back as negative real rates for US Treasuries are a fixture as the US government can't afford to enter a high debt, high interest rate, high inflation death spiral.  The Fed will eventually be forced to cut rates and restart QE to fund the massive budget deficits from an undisciplined and populist Congress that spends more and more but refuses to raise taxes to pay for it. 

Back to the current markets.  We are seeing both the Fed and the Treasury show early signs of caving.  On Friday, it was the Fed whisper at the WSJ hinting that the Fed will be looking at a smaller rate hike in December, followed by Yellen on Monday talking about Treasury buybacks and worries about liquidity.  Its funny they only worry about liquidity when bonds are going down (now), not when there is no liquidity when bond are going up (October 2014).  The stock market is running with the Fed/Treasury pivot hopes, while bonds are less sanguine about the prospects of the cavalry coming to the rescue.  

I have noticed a big shift in sentiment recently, as the bulls are coming out of their ratholes, thinking that the all clear is here, at least for the rest of the year, and they are getting bulled up again.  Even the permabears on CNBC Fast Money,  Dan Nathan and Guy Adami are pontificating on a bear market rally.  They may have a few weeks where the SPX stays above 3640, the lows from last week, but there is a lot of overhead supply and I can't picture this thing going much above 3900.  Just too many playing for a bear market rally without long term conviction, those who will be selling on strength, creating overhead supply.  Also, this market is running out of suckers who will chase stocks after a big rally.  They got smoked countless times this year, and they are quickly becoming an endangered species.  

Waiting for a short term rally in the bond market to pump the SPX higher a bit more, before I put on shorts.  SPX close to 3800 is a good short level, but want to wait for a bit higher for a lower risk short.