Why Bears Lose In Bear Markets

Late last year when posting my Christmas wishes I opined that 2015 would most likely be a difficult year for stocks. As we are now beyond the half year mark it unfortunately seems that my inkling back then may be proven right. No reason to sugar coat this – for equity traders and long term investors the pas six months have been a very difficult period with little signs of a reprieve on the horizon.

Just looking at the daily/weekly panels above should make it evident this is not the same type of market we’ve come to enjoy over the past few years (or not if you happen to be a perma-bear). I have made that point on several occasions in recent months and at the same time have encouraged you all to familiarize yourself with other market verticals, in particular of course forex and the futures. Not easier markets in their own right but much more diverse and most importantly permitting you to be nimble and adjust/abandon positions at any ungodly hour if you feel the heat coming around the corner.

As a sidenote, that scene was shot at Kate Mantilini in Beverly Hills – a place I was frequenting quite a bit ‘back in my Hollywood days’. Unfortunately the place closed down last year, adding to a long list of iconic hangouts that have been dropping off the map since I left Los Angeles for Spain in early 2012. Things change – don’t ever get too attached to the little world you have created for yourself or you may find yourself very disappointed as events starting passing you by.

Which brings me to the topic at hand. I have been pretty busy working on my systems over the past few weeks but I’m certain that there is a lot of excitement oozing out of various bearish watering holes right now. By all definitions equities look very much like they’re about to fall off the plate here. And perhaps the conclusion of the great Greek train wreck will serve as the catalyst that finally breaks the back of one of the most ferocious bull markets we are most likely will have experienced during our lifetime. Perhaps the bears will finally get a chance to inflict their big revenge. But then again, what bears are we talking about? Anyone who had real skin in the game back in 2008 has long been forced to the sidelines – I really don’t want to drop any names but I’m sure you know a few.

Why Most Bears Lose In Bear Markets

But if you’re still pining for that big monster correction out then my advice to you would be this: Be careful what you wish for as you just may get it. Just look at the chart I posted above – if you think that one represents difficult tape then think again. Not many people are skilled enough to negotiate gaps like these unscathed without having their stops run in overnight action (Skynard is a rare exception). Yesterday’s session actually may serve as a great example. If you managed to ride the tape higher off the lows banking some green on the way up then I hope that you closed out last night as the spoos dipped back down overnight to revisit the lower 100-hour BB. And are now running back up – so if you were short off the highs then you had better been nimble as well.

And that’s a rather mild example of what I expect to happen in equities should we be in the process of rolling into new market phase this year. Volatility can be a trader’s best friend but in my experience too much of it serves as a purveyor of ruin in most cases. Let me be honest – many of you reading this very post were unsuccessful riding the big bad bull higher over the past few years. I have heard all the excuses in the book since I started this blog but it all boils down to a general inability to properly plan a trade and then to trade that plan. Emotion for some reason always gets in the way. Now throw in a VIX at 30 or above with 50+ S&P handles swings in one session and then tell me honestly how you think you would be faring.

For some reason the 2008 correction has in its wake created this romantic notion of bearish revenge trading. It’s a psychological affliction that has shown to be difficult to cure and perhaps is rooted in the frustration felt over almost blatant corruption and lack of oversight prevalent in the financial industry. Which is completely understandable but one needs to draw a clear line between your personal beliefs and any activities related to extracting profits from trading the markets.

Don’t get me wrong – I enjoy a bit of volatility myself as fast moves to the downside can be extremely profitable. And any good trader worth his/her salt doesn’t care which way the tape swings. But taking advantage of technical short setups is different from constantly pining for a big correction. For one they rarely happen and probably account for under 1% of overall market activity (disclaimer – I haven’t run the stats on that and if you have please post them here). Secondly you cannot predict when they happen and perhaps the past six months testify to that fact. How many times have you thought ‘hell – this is it’ only to watch equities recover late in the session or overnight?

I’ll tell you how this is most likely going to play out: One day the tape is suddenly going to fall 100+ S&P handles and not look back. If you were lucky enough to be short that very day or the day before then you’ll most likely take a big portion of your position off the table expecting a bounce. Except that it won’t happen – dip buyers will be heading for the hills as fear and confusion takes over. As there was very little accumulated short interest in the months ahead there won’t be any bears taking profits (i.e. buying back) either. So the tape falls and falls until we find ourselves several hundred handles lower and the Feds announce some emergency measures (again). All the while you have kept hoping for a bounce to short the tape. Of course once you finally get one the bulk of the big correction will have played out. And that was it – the bear market you’ve been dreaming of in the past seven years. I certainly hope you picked the top to bulk up on shorts and held it all the way down. But wait – the top may already have printed. See how that goes? 😉

There Is Always A Bull Market Somewhere

So again, be careful what you wish for. Or better yet – stay away altogether. Just because equities may be heading into a volatile phase doesn’t mean you cannot be active as a trader. There is a long list of futures and forex symbols on the roster which offer you ample opportunity to be active. I myself post pertinent setups on a daily basis but for some unknown reason most of the chatter I see in the comment section continues to revolve around equities. Which would be understandable if it was the biggest market out there, but bonds alone are double the size of all equities combined. So is Forex with a volume over $5 Trillion traded per day! Plenty of opportunity to play the swings at your heart’s content. If you like it rough pick the volatile Forex pairs, e.g. the Euro right now or the USD/JPY. If you’re an adrenaline junkie then Natgas may be just what you’ve always been hoping for.

But if you’re a trend trader then look no further than the Ozzie dollar or perhaps cable (a.k.a. GBP/USD) – beautiful moves there. And all of them are accessible 24×5 – allowing you to trade in any time zone with plenty of liquidity. With small spreads I may add – depending on your broker amounting to less than half a pip or one tick over on the futures. So now tell me again – why is everyone so enamored with equities? Why make make one’s life harder? Just because the stock market is where all the hype is doesn’t mean that’s where you have the best odds of being successful.

Most likely we’ll see little activity this morning ahead of the FOMC minutes at 2:00pm Eastern. Be prepared as the Fed may feed an already emotionally charged market.

The future is now – so don’t bring a knife to a raygun fight. If you are interested in becoming a Zero subscriber then don’t waste time and sign up here. A Zero subscription comes with full access to all Gold posts, so you actually get double the bang for your buck.

Cheers,