i realize that my recent commentary on the market (increasingly bearish) might appear to contrast with the trade ideas that i’ve posted recently as currently, there are 15 stocks in the Long Set-ups category and only 8 in the Short Trade-ups. therefore, i figured that i would try to explain my thinking at this point. as mentioned earlier, a large part of my increasing bearish bias right now is based on intuition, as well as where i believe the market is in the bigger picture.
one driving force behind my opinion is the dangerous complacency that i am seeing in the face of potentially enormous and very real risks. not only with many key US and global banking and brokerage stocks on or near the edge of a “technical” cliff; not only with many large sovereign nations on the edge of a fiscal cliff; it’s not just the fact that we’ve recently witnessed the largest municipal bankruptcy in the history of the united states (stockton, ca), with many other large municipalities right in line behind them; it’s not soley due to the fact that individual investors continue to pull money out of US stock funds at an unprecedented rate, even many times the amount of money they withdrew during the financial crisis and last bear market; and it’s more than just the fact that the fundamentals of the US continue to deteriorate at an accelerating rate, raising the odds of another recession to almost a near certainty (assuming that one is not already underway) while yet the stock market is just mere percentage points off the highs of a multi-year, over-mature (by historical measures) bull market. it is a cumulation of all of these factors, and then some, but most importantly, what seems to me like typical final stage bull-market complacency.
back on june 6th, the day after i reversed from a multi-month bearish/short bias to a new long-side/bullsih bias, i made this post (click here to open in a new window), which summarized my concern regarding the extreme and growing level of complacency, as per my “boy who cried wolf” analogy. regardless of my concerns, i did move to a long bias and profited from doing so. now that i’ve moved back to a bearish bias, i’m still not convinced enough to go to a 100% short position but i can hear the wolf growling from just inside the edge of the woods. maybe he finally shows up this time, maybe not but one thing that i’ve noticed over the years is that often just before major tops (or bottoms during downtrend, for that matter), there is an abundance of bullish (or bearish) chart patterns. i’m not exactly sure why but i’d imagine that it has something to do with the fact that the vast majority of traders, investors and even professional money managers, always miss the top (or bottom) and the market needs to suck in as much money at the top (bottom) to for fuel to kick-off the new trend (i.e.- trapped longs or shorts).
as always, i will continue to post the most attractive patterns that i come across, long or short, regardless of my overall market bias at the time. i will also continue to trade the best of these patterns even if my overall bias is one way or the other, unless the current trend or probable future direction of the market is very clear. currently, i remain bearish from a fundamental perspective (near-term, intermediate and long-term) while bearish from a long-term technical perspective, somewhat undecided intermediate term and neutral/bearish shorter-term. the monthly SPX chart attached continues to shape my overall longer-term technical view. the primary scenario (bearish) is noted on the chart as well as the bullish (alternative) scenario.
on a final note, this market continues to favor a very active & nimble trading style and trading the best individual stock patterns vs. trying to game the broad market via etf’s or other derivatives. the shorts that i added today were all individual positions and over 1/2 of my 14 short positions in my trading account closed positive today (along with the account posting an overall gain, also aided by select longs). my point is only to illustrate the benefits of trading the best individual stock patterns and not trying to trade a very difficult, choppy and unpredictable market. as always, keep things light or stay in cash if you are unsure what to do. markets rotate between trending phases and consolidation phases. consolidation phases are often when undisciplined or inexperienced traders give back many of the gains that they made during the prior trend. if you are not comfortable with a long/short, hit-n-run trading style just remember that the next trend is only right around the corner.