In case you haven't heard yet, ECRI is now on record calling a recession. Check out the interview on cnbc here. I've said it before that these guys have a great track record and the market has certainty been acting as if were are on the way towards a recession. I've noticed the popularity of ECRI has soared. When I first discovered them 10 years ago hardly anyone knew about them and they certainly weren't making all of these TV appearances like now. One thing I've learned over the years is that when a guru becomes popular with the financial media they are on the verge of going from sage to goat. I'm not so sure if ECRI has reached this point and I'm willing to give them the benefit of the doubt with their latest call, but I'd feel a lot more confident in their call if they weren't so damn popular now a days. Anyhow, given the behavior of the markets which are one push away from making new lows, given the rise in credit spreads across the board, given the deterioration in economic gauges and now given the recession call from a firm who correctly foretasted the last 2 recessions, at the very least you have to respect the bear case if not embrace it.
The bear market playbook calls for a trading approach on both sides of the market as opposed to a long only buy and hold investing approach that's optimal in bull markets. The psychology of bear market cycles goes from despair to hope and back to despair over and over. When despair becomes acute, bears press and the market gets oversold, some sort of positive news will come along to trigger a rebound as hope emerges that the "worst is over", "the market has discounted the worst" or whatever. Then of course, that hope turns out to be false and the market heads down again making new lows. Despair, hope, despair, hope over and over until you reach the point where most people given up on all hope and that's when the bottom arrives.
In bear markets I personally like to focus mainly on index trades using long dated deep in the money options. Right now, however, neither side of the market is appealing to me. Despite the likelyhood of a new reccession and new bear market, establishing a bearish bet when the VIX is over 40 and sentiment showing multiple bearish extremes is piggish and not what I call a "sweet spot opportunity" that I look to play. We could very well be at one of those points where despair is acute and we are overdue for a "hope rally" but because the market is not yet fully ST oversold, showing no signs of bullish traction whatsoever and is one push away from making new lows, the long side is not appealing either - you must respect the primary trend in this case and that trend is down. So, in conclusion this argues for staying in cash as neither side of the market is appealing.
Let's talk bigger picture now. If the bull market we've had since 2009 was just one big economic dead cat bounce and we've reached the end game where no more or little can be done by authorities to save the economy then you better watch out because it's going to get really nasty. I sure hope that's not the case and I truly hope that all my bearish talk of late proves to be the ultimate contrary indicator.... I honestly do. I don't wish to see more misery and hardship. As a trader you need to able to play both sides of the market and not be biased towards one side but when you play the short side on an IT/LT basis you are rooting for bad news and profiting from the demise of others. That takes a toll on you....unless you are a miserable SOB who's happy to see more people become miserable too.
Be careful out there no matter what side of the market you are playing. I'm still standing aside.
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