Market Watch: Retiring the Bear

Posted On February 8, 2018 2:19 pm

Just as the market is turning lower, and our market watch gets progressively gloomier, a long time bear puts away his bias.

Given the recent news regarding the ongoing downturn in the stock market, it was very surprising to see Sven Hendrich, also known as the Northman Trader, pen an article entitled Retiring the Bear.

Just when you think this perma-bear would be taking a victory lap, he seems to have pulled in his claws.  But this is not a capitulation or throwing in the towel. After years of being gored by the bull, he seems to have decided that it’s wiser to approach the market without a big bias or strong opinion.

Essentially, he still thinks the market will head lower, a lot lower in fact, but he is going to be less stubborn or insistent about the inevitability of it.

I’ll let him tell it in his own words:

You’d think a guy like me who’s been outlining danger signs in these markets would take pleasure in seeing the market carnage yesterday. But I’m not. Far from it. I hate crashes. Corrections I’m fine with, but crashes are dangerous for everybody, bulls and bears alike. Often bears get blamed for crashes, but there haven’t been any bears as of late. Crashes happen every time when folks get too exuberant and feel invincible and price gets too disconnected from technicals and then ultimately most get hurt in some form or another if they are not careful.

And for sure many people got hurt yesterday as 4 months of incessant buying was wiped out in a mere 6 days. Retail bought the hype hook, line and sinker:

If you’re thinking this is a ‘see I told you so post’ you are mistaken. In fact, I’m using the occasion to make an announcement: I’m retiring the bear altogether. Consider me neither bullish nor bearish, but simply practical. That’s my mantra and orientation forthwith. Oh don’t get me wrong, I’ll still analyze and point things out what I see from a macro and technical perspective (and there is plenty to be concerned about), but I’ll comment from a merely practical perch rooted in the desire to identify technical SetUps.

And in this spirit, I’ll use the recent few months and yesterday’s action to give you some context.

 Related: Market Volatility Has More Than Doubled. Here’s What This Means for You. 

Here’s the reality: Even if you see macro signs that point to big turns you have to adapt to market conditions. I discussed some of this in 2017 Market Lessons and in my 2018 Market Outlook.

Frankly the last few months have been challenging to mentally adjust to changing market conditions. It really started in September and October when all the usual seasonality simply failed to appear and markets went into this ultra volatility compression mode, a steady ascent up in price on no dips and then price action proceeded into overdrive in January.

Back in June 2017 I was already pointing out that the volatility compression pattern always suggested a breakout was eventually coming:

But the pattern extended through the entire year and every trend line ping was sold creating shallower and shallower dips in the process. We knew this was ultimately nonsense and unhealthy, but opinions don’t matter, you have to trade what is, not what can be. Nobody has a crystal ball and technicals dominate.

That was part of the adjustment I went through as Mella kept shouting at me about the 15 min chart we have discussed so many times. So while it seemed idiotic to buy every 15 min oversold reading in an expensive & uncorrected market nevertheless it worked and we feasted on it as a matter of practicality. Cover & flip long for a hedge, rinse & repeat until it stopped working and so the dance went on as volatility compressed despite all the warning signs.

Still in October I pointed out this structural pattern on the $VIX that suggested a move to either 24 or 37 was coming:

Did I expect 34 on the $VIX yesterday? Hell no and I suspect many bears had covered before the final selling climax last night. Which is fine, but you got to adapt to the conditions. So while the overall downside was no surprise the speed with which it unfolded certainly was.

I’m not going to go through the entire history here, but I just want to highlight some examples of the signs that were there all along and I’ve done my best to document them and point them out along the way.

Continue Reading Here

 Related: This Trade Turns Market Volatility to Your Advantage! 

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About author

Steve Smith

Steve Smith have been involved in all facets of the investment industry in a variety of roles ranging from speculator, educator, manager and advisor. This has taken him from the trading floors of Chicago to hedge funds on Wall Street to the world online. From 1987 to 1996, he served as a market maker at the Chicago Board of Options Exchange (CBOE) and Chicago Board of Trade (CBOT). From 1997 to 2007, he was a Senior Columnist and Managing Editor for TheStreet.com, handling their Option Alert and Short Report newsletters. The Option Alert was awarded the MIN “best business newsletter” in 2006. From 2009 to 2013, Smith was a Senior Columnist and Managing Editor for Minyanville’s OptionSmith newsletter, as well as a Risk Manager Consultant for New Vernon Capital LLC. Smith acted as an advisor to build models and option strategies to reduce portfolio exposure and enhance returns for the four main funds. Since 2015, he has worked for Adam Mesh Trading Group. There, he has managed Options360 and Earning 360, been co-leader of Option Academy, and contributed to The Option Specialist website.

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