Well, the market has broken the well watched 1040 level. As per my previous posts, I'm not suprised in the least. Let's see if this will usher in capitulation or not. Suprisingly, bears I track haven't been pressing and with the market closing near the LOD making a fresh new low since peaking in April, this argues we got more work to do on the downside although we are now in dead cat bounce territory given the present oversold condition of the market.
I've noticed many bears covered shorts too early including the really stubborn dumb ones I track who got mauled last year and early this year over and over. It seems after taking such a beating, these losers have become gunshy (the ones who have any money left). I've noticed they are particularity weery of a potential bear trap from the H&S breakdown we have going on now because memories of last July's bear trap of the H&S breakdown are still fresh. Even the "pro" bears have missed this move. Bill Fleckenstein, had not been short during this slide fearing a bounce. Meawhile Douggie Kass turned bullish over a week ago and probably took it in the kiester. The ironic thing about this is that Kass was bearish pretty much since 950 or so last year including his "top of the year call" in August when the market was right where it is now! (I argued against this call). Does this mean we going to see the reverse of what happened in the summer of 2009? As bullish as I was just a few months ago, it's becoming more and more likely and it will become a reality if market action continues like this. In the ST, we are oversold enough to get a dead cat bounce soon but again, because bears aren't pressing here and because the market closed near the LOD making a frest new low, it suggest more downside ultimately lies ahead bounce or no bounce. I think ultimatley we will see puke action and a VIX spike to 40+.
The ironic thing is that this time around the permabears actually have fundamentals much more on their side as opposed to last summer and yet so many appear timid! Last summer earnings and leading indicators had only just started turning the corner from very depressed levels and were heading up sharply (check out the chart of the WLI I posted a couple weeks ago). This time around, earnings growth, although still in a bullish trend, is very stretched to the upside and due for at least a moderation while leading indicators have turned down sharply, not to mention a rising trend in systematic financial stress from low levels (whereas last year that trend was in decline from high levels favoring the bulls). So why is it bears are timid now? That's easy...ego.
When you get on a roll you start thinking that you got this game figured out and so you become bolder and bolder. (This was was the attitude of the permabears comming into 2009). You get so full of yourself that you become blind to when the trend has actually changed. You keep thinking it's a just a counter trend bounce and so you keep betting against it in size, doubling, trippling and quadruling down. Before you know it you are blown out of the water and mightily humbled. Then when the market actually does what you expected it to do or some fantastic set up comes you way you are too timid to act on it having being burned so bad and you miss it! Has this happened to you? It's happend to me in the past a number of times (I didn't blow my brains out....but I did get spanked badly). The hubris to humiliation cycle is one everyone goes through who plays this game. Human nature may not allow us to elimiate this cycle completely but the ups and downs of the cylcle can be mitigated significantly and that happens with experience and dicsipline.
I have several pages of "rules and guidelines" if you will, that I written for myself a few years ago. I have mentioned many of them sporadically on these pages. The motto of my blog is one of them. These rules were derived through exerience (i.e. learning the hard way) and the wisdom of others. Every so often I re-read those pages to keep me psycologically in check. One of the rules I have is this... "No matter how much you think you know about a stock or the market you know less than you think…probably a lot less. ". Another is this... "When you are on a hot steak realize that you probably aren’t as good as you think. When you are on a cold streak realize that you probably aren’t as bad as you think. Try to keep yourself in the middle." I have heard pro althletes and coaches say this as well. Being in the right place psycologically is so critical in the game of speculation...much more so than than in sports because there's no pysical element in this game to bail you out and there's no mathimatical or logical structure to follow that will guarentee success. For instance, on his worst day mentally, Lionel Messi is still better than 99.9%+ of the people in the world who play soccer. The same goes for a grand master chess player in his domain. But when it comes to gambling/speculation/investing, being in the right place mentally is far more critical. It's quite possible for the amatuer to beat the professional if he/she is mentally at their best and worst respectivly!
But I digress, back to the markets....I said this before...we are truley at a cross roads here. I'll say this again, if the bears end up winning this battle it ain't going to be easy to profit on the downside like many bears are finding out now. You will either get burned on a bear rally and/or cover too soon on the drops so beware....My best guesss is that we will see some additional downside and then get a dead cat bounce to about 1075 but it's just that...a guess. I won't play for such a bounce unless I see the whites of the eyes of the bulls.
This may be my last post for a while….gotta a baby due any day now!
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