Thursday, March 8, 2012
We're still in bizzaro world
I'ts been quite clear to me that the retail trading community has been short the market since at least the start of the year once again proving we're still in bizzaro world. Since the summer of 2009 I've used the term "bizzaro world" to describe the psycology of what I see in the market. Well, let me tell you we're still very much in bizzaro world when it comes to the stock market whereby it seems the typical retail trader is LOSING money whenever the market has a strong rally instead of making money which is what's normally supposed to happen. So, instead of seeing people celebrate and cheer a rising stock market, I see whining and anger. Instead of embracing the rally, people have been fighting it wasting time and money obsessing about when the market will top and the higher the market goes the stronger the hand wringing gets. One thing I learned early in this game is that if you're ever a bagholder it's a bad sign if you're angry and stubborn for it's likely the market isn't done spanking you yet. I keep thinking that at some point it's going to hit these people in the head like a brick when they realize that being the permabears that they are has been utterly foolish while the market has been up 100% in 3 years. This is denial at it's finest and something I saw after the tech crash in 2000 with the bagholders of tech stocks. Some of these permabears claim that they will "play both sides" but I've seen very few of them play the long side successfully because the moment the market shows any hint of weakness they are eaisly shaken out and embrace their inner permabear.
As I said back then in 2009, I believe this ingrained bearish, contemptuous attitude so many people have towards the market is LT bullish. It prevents me from fully embracing the bear case even when at times it seems quite convincing. For for the bears to be right about the LT doom towards the economy and the market it would mean that your typical retail trader, which history shows over and over lose money in the market over long periods of time, is going to be right and that's a bet I don't want to make.
So, why is it that we have bizzaro world in the stock market? I believe the underlying cause is bitterness. Bitterness for having been burned as bulls just prior to the big crashes in either 2000 or 2008. I'm quite sure that most of the bears I see today that dominate the blogs and message boards were once optimists who then turned to the "dark side" because they got burned either in the crash of 2000 or 2008. Being burned is the underlying reason for their conversion to bears and the bearish arguments they preach are simply rationalizations to justify and entrench their bitterness. I'm quite sure they will vehemently deny this. I'm sure they would retort by saying they turned bear because the facts of reality made them. I don't buy that for a second except for the fact of reality that they were once burned as bulls and are bitter at the "system" which pulled the wool over their eyes. They are angry at CNBC and the "pumpers" they listened to, angry at the fed for "manipulating the economy" into creating a "false prosperity"which suckered them into believing all was well. For many, this anger and skepticism has become so ingrained that I believe they are scarred for life and will NEVER be LT bullish on the stock market ever again unless we see a total and complete collapse which they pray for every day. So many retail traders are dedicated bears now....it's the complete opposite of 1999.....it's bizzaro world!
Bizzaro world does not mean we will never see the market go down in a material way...it can and it has with the downdrafts in mid 2010 and 2011. For me to place any downside bets or go heavy in cash I need to be really convinced that one of these types of declines is forecoming i.e. all the ducks have lined up. If I don't see that I give the benefit of the doubt to the bulls...and I'm not talking about 2-5% corrections which I admit we are due for and perhaps may have started this week....those are not worth paying attention to on the grand scheme of things if you have good reason to believe the upside is still significant because if you get it wrong you will be on the sidelines or worse, lose money as the market keeps chugging a lot higher which a lot of people out there have learned the hard way. And when we do see material downside, bizzaro world suggests that no matter how hopeless the situation appears, you have to have faith that somehow, someway the bulls will ultimately prevail to once again make suckers out of the group that is notorious for being suckers- the retail investor who has been largely absent on the long side since 2009 despite a monster move up in the market.
Lester update. Here's what he posted earlier this week.....no wonder the market has been on a tear lol!
Good evening all. I have to make a confession. I have been making bogus bullish posts because I kept thinking that I could use some reverse psychology and get the market to reverse and go down. In reality I have been shorting this monster of a SPY market since January. I have watched my portfolio piss away due to a 40 pt rise in the SPY and the fricking VIX has been dropping. I have been pretending to be making some money and winning but the truth is I am down to $150 in my account. I own a SPY Jun 119 Put (or is it a 124 I cannot even remember). Of course I got killed by DNDN which has cost me $160 smackeroos. Now a think I will post a joke because my account is a joke. I should have just played AAPL Calls and I would be happy.
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We are still in the early accumulation phase by the institutional investors wouldn't you say? All the dips are getting bought with conviction by the pros. While main street retail community is still holding the belief that we are in a tough economy and things could get worse.
ReplyDeleteCan you talk a little about trading in bull market? I realize in bull market the best thing to do is just buy and hold. But you have also talked about before having a core position and trading around the edges when you sense a correction is coming. How much of a core position do you usually hold of a stock? 50% or more?
ReplyDeleteAlso Natural gas just can't catch a break. Do you think UNG is ever a good play or I should just stick with natural gas companies? ECA looks good bottom formation but so far haven't shown anything yet.
Yes, buy and hold is indeed the way to go in a bull trend. It takes a lot of patience and courage to follow through on that though doesn't it? Depending on the circumstances I will designate upto 1/3 of my position as "trading" keeping the core in tact at all times until I have good reason to believe the LT trend is in danger of exhaustion. But in my experience, most of the times I "traded" around a position it would have been better for me not to have done so. Big money is made riding big trends and these trends can go higher and accelerate faster than you think possible which is why trying to capture all the minor ups and downs often proves futile and leaves you on the sidelines. When you're right, sit tight...that's one important lesson I learned.....easier said than done I know. Having said that though, it also comes down to "feel". There were times like in last June for example where I felt it was best to step aside with my LT positions and go to cash because I sensed bad vibes with the market even though I was still positive about my stocks LT. It was the right thing to do but in hindsight, an even better move would have been to keep my position and shorted the market as a hedge.
DeleteAs far as nat gas goes, it's going to require patience as I said a few weeks ago. The momentum is down and as you should know by now, momentum in any trend can linger for quite some time. We could be seeing a double bottom attempt here in the nat gas price but don't hold your breath....wait for the confirmation. Stay away from UNG because the price decay due to contango in the futures is just killer. What a disaster that ETF has been. Tough to say if ECA is bottoming or if it's simply being buoyed because of the strong markets.
If you start to see nat gas stocks outperform the market for 3-6 months without too many people noticing or embracing it, that's when you should get really interested. Untill then, it's Ok to establish a "starter" position only, for you don't want to have a lot money tied up in a potentially dead money sector or even worse a declining one.
I was reviewing my trades since December of last year, had I stayed in the buy and hold mode I would've been up so much more this year. Sigh... what can you do. My biggest screw ups are not my entries but my exits it seems. It's so frustrating for an average retail guy to know the turning point of a market trend. But I will not stay wrong and trade myself out of a position again. Big moneys are made riding the big wave, so I will stay more of a investor now on.
ReplyDeleteAt the beginning of February you said you will only have 50% of your account invested, do you still share that view or has anything changed?
Most people will say the same thing - that their entries are better than their exits. Like Livermore said, he knew many people who were correctly right near the beginning of a bull or bear market (good entry) but nobody who stayed the course until it's end (poor exit). I think there's 2 main reasons for this 1) people can't resist taking a nice profit even when they have good reasons to expect more 2) people underestimate how big the trend will be even when they are correct in calling for it near its beginning.
ReplyDeleteIn order to ride a big trend, you first of all need to be true believer of it. That will give you the conviction to be a strong holder during the corrections some of which can be severe. If you don't have such conviction you'll end up getting shaken out during such corrections for it's during the corrections where your convictions are truely tested. It's easy to say "i'll buy and hold" when the market has been up like this but will you be able to say that on a big drop? Be honest with yourself. If you know deep down you can't then you have to take a more active approach. The cost of that is you will probably end up leaving money on the table but that's better than selling near the bottom of a correction which is likely going to happen if you use a buy and hold approach with weak conviction.
If you do in fact have the conviction to ride the big trend you then need to be patient and resist the temptation of taking profits too soon trying to time all the wiggles. Designating a portion of the position as "trading" can allow you to pull that itchy trigger finger and release the anxiety that builds when you're sitting on gains but NEVER dip into your core for a trade.
Don't mistake conviction with stubbornness and denial like legion of TVIX/TZA/SPXU bagholders out there right now. Be RIGHT and sit tight not wrong and sit tight. When first entering a position, I typically use a "starter" amount which I'll give plenty of opportunity and wiggle room to prove itself i.e I won't have a hard stop. I will only add to that position when it's acting RIGHT. When it's acting wrong, i.e. it's underwater, I'll either hold or sell but again, I'll give it plenty of time to wiggle room to prove itself so I won't be hasty in selling unless there's something fundamentally bothersome that's new.
As far as my account goes, yes I'm still about 50% invested but it's in a handful of microcap stocks which tend to have high leverage. I'm very close to pulling the trigger on more positions but I don't anticipate having more than 65% invested if I do. Discipline/prudence needs to balance conviction to some degree and given the run the market has had some prudence in the form of cash is warranted. It also gives me piece of mind. If I was a 100% invested and we had a scary correction I'm not so sure I would be able to sleep at night and be strong enough to hold all my positions but with a 50-35% cash reserve I can.
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