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"Merry Bear Markets!"

[May 26, 2000]

"Stuart, Stuart, Ameritrade sent me a margin call!" "Rock on, Mr. B." "WHAT?"

So now we should all have a pretty good idea of what a bear market feels and smells like. It's pretty nasty, isn't it? Just when you get your hopes up with a mega rally, it fades away and we set new lows. Money just seems to disappear. Bad news seems to come out a lot more often than it did during the bull market, and you certainly don't see many buyout deals or news that send stocks rocketing up 45 points.

You see articles worrying about what the Fed will do to interest rates, for once. What had been dismissed before is all the sudden taken very seriously. It's all about perception, even if your favorite stocks keep dropping and dropping. And good companies too, the ones that rule the world.

But that's the whole point. In a bear market, valuation and fundamentals and all that crap don't matter. People just indiscriminately sell whenever they get a good bounce, or even when they don't. Short sellers ride their backs as the bids on stocks keep dropping. Then when the bounces come, they're hellacious because the sellers have been temporarily exhausted and shorters have to cover, fueling trader buying.

Of course, the market eventually gets to a point where all the panicking sellers just capitulate and people begin to look at what money they have available and then find that certain stocks are at attractive levels for once. Then the buy, and the process becomes anew. Bear markets tend to last much shorter than bull markets. At least, that's the way it's been for most of the twentieth century. Is it ever different? Boy, I hope not. :P

Day in and day out I watch very experienced traders getting excited about any sort of bounce to the long side. It's unfortunate because the overall trend is down; there are more points to be gained on the short side. Yet they persist in only playing long, never shorting. They have any number of reasons -- it's un-American to short stocks, if I start now then I'll do it right at the bottom, I can't short on a downtick, I don't know when to short and when to cover, etc. etc.

It's a mental block for them. Stocks are supposed to go up, and playing them down is unnatural. While I can understand that, it just does a trader such a disservice to only play the market one way, and particularly in a way against the main trend. They give up so much profit and so much logic with this barrier.

For me, the Nasdaq correction was a huge learning experience. The stocks just plummeted. They had nothing to keep them from falling like rocks. I will always remember this for future spring sessions. The low-risk, high-return of shorting at that time of the year is phenomenal. A trader plays both long and short and is always critical of what his perception is of the market strength, lest he deceive himself.

Something else that becomes painfully obvious in a bear market is that stock holdings are just worthless pieces of rag paper with no intrinsic value. There is no reward for loyalty in a bear market. The strong stocks may hold up for most of the bear market, but eventually they will fall, and it is at that final capitulation that people think the market is done for, and they sell their favorites. Then, of course, things swing back up.

But I just have a serious problem with "long-term investing" unless it's through mutuals. The summer and fall are killer on the stock market, and through my experiences trading, I know that there are people who are busy shorting my favorite stocks down into the ground during that time, piggybacking on scared longs who want to get out while they can. I would rather short the way down than endure the protracted bear market. This of course applies mostly to more speculative stocks, and not so much to older stocks. At least those give dividends.

Am I bear? No. I am a trader. I play both sides of the market, whichever way is providing the most opportunity. That's the name of the game. In a larger sense I have a good idea of what companies I think will survive and fail, but in the short-term, I have no loyalty and CAN'T have any loyalty, or else I'll get burned.

What I know is that these stocks used to have buyers paying insane prices for them, and now they're at firesale prices in comparison. Of course, people always look at the high of a stock, and never the low. What may seem like a good buy here may still be way above its nearest major lows. With this kind of blindsided bullish mindset in the market, is it any wonder there's much money to be made on the short side? Is it any wonder a lot of people got burned this spring because of the Nasdaq?

...

Now that I've graduated from school, I have a lot of time to work on my trading more. Having bought Trading for a Living by Elder and The Electronic Day Trader by Friedfertig and West, I'll be doing some more reading into the trade that I've undertaken. Also, I've resolved to start keeping a personal daily diary of market events, fit with predictions, major events occurring that day, and goals. I plan to give myself a letter grade (god, am I trying to compensate for not having any classes anymore?) in order to critique my overall daily performance. I feel I have learned from many of my mistakes, but this will allow me to be far more objective and thorough about my trading flaws. Also, I imagine it will help me take a more reasonable look at the daily events. As the diary becomes longer and longer, I can look back at my worst and best days to see how things turned out and why they happened that way. This is, after all, my new profession. It's to be taken seriously.

This weekend I'm going to open up a paper portfolio. I'm going to paper buy my favorite long-term (for tech) stocks and see where I end up by next January or so. I figure stocks are very nearly at their bottoms and this is a good time to begin scaling into paper positions. See, one of the worst things for a trader is to look back after a major swing in the market and see how much opportunity he missed. For instance, right now we traders are looking at all the shit that was at $200-400 and is now at $50. I want to see where my favorite companies at these low prices will be by the new year. Hopefully I will outperform it by trading. If not, I'll have to modify my style, huh?

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