Here we go again. In the past couple of weeks I've noticed the "R word" being used quite a bit in the financial media and by that I'm referring to the word "recession". Talk about dejavu...again! Remember the double dip fears we had in 2010 and then again in 2011? Those turned out to be false and now here we are for the 3rd straight year with summertime recession chatter. You shouldn't however be automatically dismissive of these chicken littles just because they were wrong twice in a row; just like how you shouldn't automatically embrace the views of those who have been right for a while (think Roubini and Whitney in 2009 like I warned about back then).
This morning Spain announced a 3 month short selling ban on all stocks. Historically short selling bans result in even further declines perhaps because it removes liquidity and signals desperation. I don't really care about the whys, I just care about the whats as in what are the results. Remember the short ban on US financials on September 18, 2008? It was followed by a 2 day pop and then disaster for the market especially financials. The was also a short sale ban in September 1931 and what followed was not good for longs either. But, if you also recall, there was a short sale ban of financial stocks in Europe last August and timing wise, it was not too bad a time to go long European equities (only of high quality countries like Germany) intermediate term. That ban was followed by a pop and then a lower lower in September which was significant (about 10% lower) but not severe and then a big multi-month rally took hold. In every case though ,a short selling ban didn't mark the final bottom of the market in question and so I doubt very much that the final bottom in Spain has been reached and perhaps that applies to all of Europe as well even if there's a big ST pop.
During the past 2 summers the markets were what I would technically consider bear markets (albiet small and short lived ones) because the market behaved like how bears do - downwards/sideways trend with high volatility whereby overbought conditions are resolved poorly. We've been in the same condition since May. Overbought conditions have been rejected easily but on the flip side so are oversold conditions so that's the good news which suggest we may end up being in a "sideways, mini-bear" like the last 2 summers as opposed to full blown bear. But I wouldn't get too comfortable with with that notion just yet.
As far as conditions are right now, what's strange is that despite the market having been strong in the past couple weeks, AAII sentiment was 2:1 bears vs bulls which is what you normally see after the market has had a significant decline and is near a ST or IT low. On a stand alone basis, this reading suggests we're not ready to go down big just yet and that the rally has more juice in it. Maybe that's going to end up still being the case but most other sentiment indicators, as I pointed out before, are in the opposite condition of what AAII is and do in fact suggest the market is vulnerable to at least a significant pullback.
That AAII reading really psyched me out and prevented me from making the bearish bet I have in mind making. I realize that this AAII reading could very well end up being a red herring given the condition of the other indicators, but I simply refuse to make a bearish bet with 2:1 bears vs bulls because you'd be a fool so many times in the past if you did so. Perhaps my pickiness will cause me to me miss out capitalizing on the downside. I have to admit, I'm a bit pissed off that I missed out on the dip we saw today. When you miss out on a trade it's tempting to want to make a "revenge" trade but this is what the often sadistic Mr. Market wants you to do. He wants you to make hasty, emotionally charged decisions. He wants you to "reach in" to grab the money so that he can give your hand a hard slap and if you overdue do it, chop it right off.
As I type this the market is making a comeback and has erased about half the intraday losses. If you're a bear who's been betting on the big downside break you're probably swearing at your computer pulling out your hair. Again, this is what Mr. Market, the tormentor likes to do. He will make sure that during any major move up or down, the least amount of people are on board to profit from it and so that means plenty of headfake shakeouts. He will often push your convictions to the very limit and beyond.
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