Sunday, October 12, 2014

Why All So Bearish Suddenly?

It hasn't been easy being a bear. I have even been silly and cocky and called for a market top back in late June when the S&P500 was at 1960 (I was short, it was painful). In fact, I have been bearish ever since the stock market went UP during the government shutDOWN back in Oct 2013! Although I have a short bias, I have been trading the market moves both up and down. If I had still been holding onto my shorts since October, I think I would have been bankrupt by the year end of 2013!

So even though I have always been largely bearish about the US markets since last year, just reading the headlines of news articles and blog posts over the weekend is enough to turn me short term bullish! Is everyone turning bearish all of a sudden together at the same time?

Looking at charts, it does seems to me that markets are actually technically short-term oversold. Can they bounce back up? Considering the VIX is at resistance and all the bearish talk out there, I think it's reasonable to think that a relief rally could happen here. The S&P500 is sitting at 1900, which is a good psychological level for people to come in to defend that level. This is actually the April and May high, so it could provide some support. The latest post by Tiho from The Short Side of Long actually also somewhat supports my theory of short term oversold and the 1900 being an interim support, but he has a lot of indicators and graphs with analyzes it from a different angle. Be wary of future rallies, he warns.

Rationally think about it, I feel like taking profit on some of my shorts. Odds of a short-term rally is much more likely than a further sustained down move. However, reading this post by John Hampton is stroking my inner greed. The toolkit of a long term buy-and-hold investor need not be very large. Just identify a time frame to work with and just buy the dips. The bigger the down move, the bigger the buying. However, the skills needed to trade and short an instrument is definitely not as straightforward. Also, shorting at the turning point of a multi-year rally is also different from shorting the rips in an established bear market.

I am expecting the decline to continue this week, and things might go from bad to worse. In line with the history of market tops, we still haven't seen a waterfall decline yet.

I am greedy and I am hoping that this waterfall decline does come soon, at which point I will exit and take profit on all my shorts. Wait for the recovery rally, then short the rip. If the market doesn't continue heading down, and instead starts looking healthy, I will decide to book some profits to lock in the gains and wait for another opportunity to add on shorts.

Currently, what are my short positions?

I have been short these positions since early August. I am keeping to my resolve to hold onto my shorts given that now I have quite a comfortable margin of safety since the trades are now in-the-money.

Trading the markets on leverage is a very psychologically taxing activity, and going short makes it even more scary. Oh well, let's see what the market is going to do and I shall try to act accordingly.

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