Bears getting comfortable again

I speculated in an earlier post that there was probably a good number of bears who covered far too early during this dip....probably at around 1100 or so expecting a bounce which didn't come. In fact, I would bet a lot of money that most bears DID NOT even come close to fully capitalizing on the crash of 2008 because of exiting positions too soon like this and then of course, they got burned badly in 2009 shorting what appeared to be "a gift". I've always said to beware of when the market gives you a gift. The easy trade is usually the wrong one.

After getting burned repeatedly for 10 months any bears who survived the rally became gun-shy and for good reason. At the same time Rydex traders, who after being humiliated time and time again whenever they ran for the hills at the first hint of weakness have been slowly dragging their feet towards capitulation this time around because they became too comfortable with dips. On the dip towards 1100 I bet Rydex longs were thinking "I'm not bailing this time. Every fucking time the market dips and I bail it rebounds the next day". Mr. Market tends to change his stripes once too many people think they have him figured out in order to satisfy the motto of this blog. I suspect Rydex traders will be giving up the ghost very soon.

One particular permabear I track said has had a resurgence in confidence and I suspect a lot of the other permabears are feeling the same way...here's what he said this morning:

Among the body of the trading populous, there is surely a subset of folks that are bearish and wanted to short the devil out of the market once a huge bounce took place, and now they are furious with themselves for having missed the boat.

I'm not in this camp, but I'm certainly partly angry with myself for not being even more aggressive.

The psychology that has caused would-be bears to hold back.........and caused your long-suffering narrator to not be as aggressive as he might have been.........has easy-to-identify origins. Let's face it, for the past ten months:

+ Every dip was a buying opportunity;

+ The government clearly was not going to let equities fall;

+ Goldman Sachs wasn't going to let equities fall;

+ Short positions were good for one day; two days, tops;

+ Just like in the movies and on television, we all knew that things were going to work out fine in the end.

Rallies are now selling/shorting opportunities. The kind of event we saw on Monday/Tuesday is a gift to bears.

I noticed the "rallies are now selling/shorting opportunities" type thinking from non-perma bear traders as well on the realmoney.com site. Here's a comment I found interesting "Assume the worst. The safest play here is to look for more downside". Really? This is the safest play? With 10% of stocks trading above the 20 day moving average and a market one downside move away from reaching maximum oversold? You don't see comments like this at the beginning of a bear market down leg. You see them near the end of corrections. Comments like this also suggest to me that deep down inside most traders, who claim to play both sides, are still bearish at heart and from a longer term perspective that's bullish. After the crash in 2000 it was the opposite. It took several repeated shovels to the head before traders shook off their permabull mentality to buy on dips. Being long term bearish back then was just as uncomfortable as being long term bullish now.

On Christmas eve I said this: if we do see a break out I suspect it will get retraced eventually because we don't have the "powder keg" type build up of ST pessimism in the market . With the market quite oversold and so many trader types both the permabear and agnostic type now eager to short bounces bracing for the worst I believe there is quite a large "powder keg" building beneath the market which will fuel a explosive advance shortly although I'm still looking for a bit more capitulation from bag holding longs and more fear in the VIX and put/call ratios.

The job numbers were disappointing but yet futures have popped higher and the markets look like they will open up flat. It's going to be a game of chicken today between traders which I want no part of. I'm still waiting for the "all in" buy signal. It's almost there but not quite. This situation reminds me of the Battle of Sterling Bridge Scene in the movie Braveheart. Bears (the English) are confidently making a charge while the Bulls (the Scotts) are just sitting there waiting on William Wallace's command to spring a deadly trap. "Steady....hold....hold....."