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A Survival Guide for Bears in a Bull's World


A discussion of the world's debt problems, and the psychology of adjusting to the market when it's bullish anyway.

The point I'm getting at is that many of us have programmed ourselves to continue reacting to events even after they've passed, or to react to imaginary events that are not actually occurring. This type of tendency is dangerous in trading because trading often requires us to reverse on a dime and let the past go.

Further compounding the psychology of this issue (for traders) is the fact that we all base our future expectations on the past. This comes about from our observations of how things work in the physical world. If we throw a baseball, we can actually predict exactly how far it will travel based on its trajectory, velocity, etc. Everything in the macro-physical world is subject to the laws of inertia. This leads us to look at the market through eyes that are conditioned to expect things to travel in a straight, orderly, and predictable way. Yet it goes without saying that the market rarely does that.

Bears have to recognize that while gravity is a law of physics, it is not a fundamental law of the market -- and bulls have to recognize that "what goes up isn't necessarily going to keep going up forever and ever, amen."

Thus I think that in order to achieve maximum success, no matter what our bias is, we should all strive to be "neutral" traders -- at least as much as is humanly possible.

I think one of the edges bears have is that they recognize and acknowledge that there are very real dangers present in this system. Some bulls are of the "blind faith" variety, so when the tide turns, certain folks won't see it or accept that until it's too late. I think one edge bulls have is they aren't afraid of every little piece of bad news -- sometimes bears can get hyper-focused on certain things and miss the fact that the Fed is pouring liquidity into the market to the tune of $120 billion per month.

Anyway, since I cannot foresee or predict anything as complex as public and private finances on a worldwide scale, I'm bullish or bearish primarily according to what I'm reading in the charts (and based on short-term fundamentals like Fed liquidity). Despite my fundamental bearish bias, my read of the charts has led me to favor a bullish intermediate outlook fairly consistently for a number of months now, and my intermediate upside targets from November are now finally within a few points of being reached. I have not committed whole-hog to the long-term bull case yet, because there are a number of key levels that serve as demarcation lines for a long-term bull market (which I've covered in previous updates), and until those levels are crossed, I am only "cautiously bullish." But the reality is, unless bears can put a dent in the current chart picture, I will have to remain bullish -- not because "I'm a bull," but because that's where the charts and the liquidity picture presently lead me. Trade safe.

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No positions in stocks mentioned.
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