Monday, March 26, 2007

Why I Am a Bear

Quite often people write to me (or comment on this blog) asking why I am a bear.

Let me first state that I am quite aware of a couple of reasons why a person shouldn't be a bear:

(1) The whole world is against you. From the investment banks, to CNBC, to Jim Cramer, to the brokerage houses, everyone on the planet wants the market to go up forever. There is a huge, huge, huge vested interest in the markets going skyward for all eternity.

(2) No one gets rich being a bear. Fortunes like Warren Buffet's are made by investing in stocks that reap multi-thousand percent gains or more. There is no one on the Forbes 400 that got there by being a bear.

Having said that, allow me to explain myself and hopefully set this question to rest.


For the sake of organization, I will break my reasons into three sections: Personality, Rational, and Irrational. I feel a little awkward posting a blog entry like this, since it resembles more of a confidential therapy session than technical analysis, but I want to be very clear about why I am disposed the way I am to shorts and puts instead of longs and calls.

Personality

Impatience: I'm not the most patient soul in the world. And the fact is that markets fall much faster than they rise. For instance, on February 27th, the market plummeted over 500 points in just a few hours. It takes weeks to go up that much (usually). So I'm drawn to fast-moving markets.

Worrywart: I'm a worrier by nature. I wouldn't go so far as saying I'm a pessimist, but usually I tend to see the things that will go wrong faster than I will see the things that will go right. Hence - - bear-dom!

Unconventional: Somehow I'm wired to want to be different. I like to stand apart from the crowd. Per my introductory paragraph, being a bear is by its very nature weird and different. If you happened to be this way during the 1980s and 1990s, it's also terribly unprofitable! I guess I could file this under 'Irrational', but it's part of my personality, so I put it here instead.

Rational

The Macro Economy: There is simply too much evidence of a sea change afoot for me to ignore. When I was growing up in the 1970s, things were generally pretty bad for America. We were coming out of Vietnam. There was stagflation. Carter was president. Media images of long gas lines and unemployment lines were a daily fixture. And out of that malaise came a huge resurgence. America was essentially "basing" for a very long time and exploded into success, wealth, and power.

That doesn't last forever, folks. Once you're really, really fat and really, really rich, you get soft in the middle. There is way too much mega-wealth sloshing around for anyone to believe that the U.S. is a lean, hungry machine waiting for burst into newfound success. Everyone in the Forbes 400 is a billionaire now.

Don't get me wrong, I love America, and I remember well during the early 1980s the feeling of pride that America was on the move again. But things move in cycles, and a big down cycle is coming. The grotesque wealth among a powerful few is a harbinger of a change. The forthcoming IPO of Blackstone is just another sign of this.

Long-Term Charts: I'm a chartist. I believe in what charts can predict. And every long-term chart I see (and when I say long-term, I'm talking about over a century in some cases) absolutely screams "TOP!" to me. And if you study the charts well, it doesn't predict a few hundred points off the Dow. It predicts a cataclysm. I want to profit from it.

Social Observation: One of the few verbs I remember from four years of Latin in high school is 'speculare', from which we derive the term 'speculate.' This verb doesn't mean "to gamble" but instead means "to observe." I am a speculator, and as such I am an observer. I consider myself pretty tuned-in to the social mores and climate of the U.S. and, in particular, the Silicon Valley where I reside.

I can tell you everything I see is far more indicative of a late 1990s style arrogance and bravado than a mid-1970s humility from which great companies like Apple and FedEx were born. What kinds of companies are being born today? The United States is populated in large part by a young generation that has never experienced a bear market in their lives.

The Irrational

Revenge: In the interest of full disclosure, I will be the first to admit that a portion of my bearishness comes from a sense of feeling cheated out of the amazing gains of the 1990s. So I'm wanting my share of the pie, having missed out on the amazing bull market. This isn't logical, it isn't sensible, and it clouds my thinking. But I at least have the clarity to recognize it.

And there we have it. As the tired cliche goes, the good, the bad, and the ugly. Today's market had enough interesting things going on that I could have spoken about it instead, but I felt it was high time to tell my thousands of daily readers just how my head was screwed on, for better or for worse. Good luck to you.

34 comments:

Ravi said...

Good explanation Tim.

Having gone through the 2000s market, I do feel that a solid bear market is needed for people to get back to the ground and become humble again.Lots of them feel invincible :) and do not want to believe or acknowledge cycles.

Ravi

p.s - hoping that you would post something on NZD soon..

JakeGint said...

Tim,

Your thoughts on today's action?

I stood gawping as my RUT puts did their beautiful nosedive, only to rise, in an almost perfect inverse hypotenuse, for the rest of the day.

And on crap volume!

Whazzupwitdat??

NPF said...

I agree with the sentiment and thanks for the blog - I visit most days. On a lighter note, do you think I have time to profit from the up move by ANDE before Armageddon? Simon.

TOMTHETRADER said...

Tim , The TRUTH what are you doing ! No one tells the truth anymore ...why not lie and say the market really was down today and oil will cause a worldwide collapse >??? You are a great chartist and excellent teacher / communicator....you get so many readers because your material is fascinating !!! With that said I commeted on your last article saying we may go down a % and then back up to fulfill some short term overbought readings and sure enough the market accomadted the Bulls. Bull markets ..especially the last leg in which I believe we are in can get so frothy !!! I personally think that we could go much higher than the 1000 points I said just the other day ...the 50 QQQQ by July might be light !!! We will be hitting all time highs again but this time the leading indexes will be IWM and QQQQ and the finacila heavy S and P may hold back awhile. I was hoping the short term would back and fill more and it might but looking at your chart ..it is tough to see anything but higher from here for 1-3 months ...I want to be a bear ..I just can't afford it !!! I will be one soon if GT and X and some of the others keep doing the AAPL impersonation...it could get frothy in a hurry. Hang in there , and please everyone buy the book , i find myself reading it in the middle of the day !!! My wife is thinking it's a porn book or something !!! Great Book by a great chartist..probably get into the Hall of Fame with few others ...it's a pleasure to be a part of this blog !!!


http://www.ttthedgefund.blogspot.com

TOMTHETRADER

Tim Knight said...

Jakegint,

I was disappointed that the triple digit drop didn't stick, but none of today's action violated the stuff I was talking about on Friday (e.g. the retracement). Bottom line is today was DOWN (albeit not much), so that's always a good thing.

I would also say that the SPY, DIA, and QQQQ barfed just after the close, so a lot of the late day gains disappeared.

mde said...

Well, tim you sold your puts to early on that huge down day in Feb. You should let us in on your annualized returns and ytd performance to show us how good of a trader you really are. The book is interesting but are you actually making money being a bear in the last few years?

Dougo said...

That's a beautiful picture of a Ursus arctos horribilis. Groowwwwllll.
Just got you book a few days ago, your blog supplements it very well, your hard work is appreciated! I still think one should be a little concerned that the bulls (with their very thick skulls) have not yet got the message. No position on IBM but the Fibonacci fans are pretty lovely to look at.

Grrr.

beanie11111 said...

I think there's a time to be bear, but should not be ALL THE TIME. Lessons could be learn from many of the great bears throughout the decades. Many have suffered a dreadful fate and some have regretted being a permabear and believed they could have made more money being a bull.

It is almost certain the markets will have a crash of epic proportions (probably causing another depression) but i don't think it will happen every year like the bear screams. Every bull will admit a huge crash is coming, possibly in the next 5 years or so when the baby boomers retire. For that major crash to occur, we would most likely need to get to another extreme of euphoria (there was no euphoria in February). There's just too many cash on sidelines and the taxi drivers haven't started giving stock tips.

Dennis said...

Hey Tim,

This is your buddy Dennis from the MarketMax days. I just began reading your blog recently and found it quite helpful. I use both fundamental and technical analysis for my trading. I agree with you completely that we are due for a massive bear market. I arrive at that conclusion based on my fundamental research:
1. The subprime problem is only the tip of an iceberg. The real problem is the massive debt carried by both the US consumers and the US government. According to the U.S. Comptroller, David Walker, the total US liability in today's dollars is approaching $45 trillion dollars given the massive social security and medicare programs. There is no way that the US government can pay that off without massive tax increases or massive printing of the dollars which will cause a great inflation.
2. The US dollars will suffer a massive devaluation because the foreigners (mainly Japanese, Chinese and Russian) will dump dollars to escape this inflation hell.
3. No economy will be safe from the coming US recession/depression because they depend on selling their stuffs to US consumers. Don't be fooled by the insane Shanghai stock market because the Chinese economy will suffer a depression even worse than ours. This will lead to a great social upheaval in China.

I wish this isn't so because I did benefit from the great bull market of the 90s but that is the only conclusion that I can draw.

Dennis

Louis said...

Hmmmmmm.
Profound contemplation day, I guess.
Why are BEARs negative, in contrast to Bulls being positive? Up & out is positive, and down and in is negative? Can a forrest rejuvenate itself without parasites & organisms that decompose old trees & dead animals into a fertilizer so new life may spring from them?
Even a wild fire is not act of rejuvenation & cleansing of nature?(Unless of course it was done by an arson: though even that can be a part of grand design...)
It is human trait to see everything as entities of polar opposite, and we name them as friendly & hostile, good & bad, constructive & destructive, like & dislike, holly & evil. And whenever it does not agree with our tastebud, we accuse, condemn, are we not?
In this action, we unconsciously play a blind god, ranting & screaming a heresy, god of a lynching mob...That itself is heresy.
So one should be free to move from bull to bear to bull camp again, with ease. And for the moment I am a bear. I have no one to conquer, nothing to prove, just want some profit and a joy of hitting the target.

zeus111 said...

This is what another blogger had to say about Tim. This is so funny I suggest everyone sees it. Tim you probably know it but if not check it out it is unbeleivably funny. http://www.tradinggoddess.blogspot.com/

Also a comment about Tim being a bear. He is not really a bear he is a closet bull. Being a bear creates controversy and increases the traffic on his blog so he pretends he is a bear. He lives a double life folks thats my conclusion.

JakeGint said...

Holy scheiss, a genius who googled a Black Scholes equation!

If I might proffer a tip to the genius: when you're in "accord" with Fischer and Myron, you always want to make sure your spelling and grammar are up to speed as well.

"Lite" indeed.

Sqroot said...

Well, I don't know if being a bear is negative or just realistic. Anyway,
Tim, that will be $1500 and I'd like to see you again next week. We'll help you work your way through this. ;=}

Tim Knight said...

Hey, Dennis! Great to hear from you! Thanks for the comment, and please post more in the future!

As for that "lite" fellow, I am totally happy to take my slings and arrows here, but his comment was so blatantly hateful and abusive I felt it inappropriate. You're welcome to think I'm a putz, but please don't waste your time reading this blog or anyone else's time leaving nasty and pointless comments.

- Tim

Tim Knight said...

"Well, tim you sold your puts to early on that huge down day in Feb. You should let us in on your annualized returns and ytd performance to show us how good of a trader you really are. The book is interesting but are you actually making money being a bear in the last few years?"

Sorry, this isn't a forum for you to frolic through my personal finances. This isn't being a fund I am running. It's about my view on the market.

And since you're so concerned about my financial well-being, I assure you that my interest in the markets - which led to the creation and then sale of Prophet - provided me ample comfort and enough cash to blow a few trades here and there.

Louis said...

Tim, Tim, Tim...

So soon? Already forgot AH indicator??? What art thou has become.....

has not Hatred & violence benefetted you immensly?, when you looked at it, rather, observed thru cool shade of detatchment as you yourself mentioned tonight??

Can one ask for clearer sign?

As for the record, I have received a message here tonight of not an impending doom but a presence, herculean in it's magnitude, now, here.

charttrader said...

on a more tech note, looking at the QQQQ, it looks like what is called a bearish megaphone top reveral pattern - higher highs and lower lows, check it out!!

mde said...
This comment has been removed by the author.
beanie11111 said...

I'm upgrading FSLR to $170 within 2 years!!!

You also need to be in SMSI and GIGM!!!

Humble1 said...

No doubt about it, sizzle sells. That's why snake oil was so popular in the late 1900's.

z-stock said...

I’m perpetually concerned, a stock is going to lose half it’s value overnight....
So I’m constantly searching for stocks to short....As a result, I got good at shorting stocks.....
I’m no perma bear, just a very concerned bull.......

zz (short sell) top...

beanie11111 said...

With all due respect, humble1, as i don't really want to impugn on your humble opinion about snake oil but i do want to open your eyes. It was popular in the 1900's was because it actually worked for alot of people that had arthritis or joint pain. It originated in China but when it was brought to Europe, the European pharmacies actually felt threatened by the competition and so they attacked the remedy. (It's kinda like natural vitamins vs. patented pharmaceutical drugs today. Pharmaceutical companies will always have something against natural healing. It should be obvious as to why.)

Some of the pharmaceutical drugs we have today actually originate from HORSE URINE, one of which is Premarin. http://www.hihopes.com/premarin_info.html

Now if you ask me, on a one to one comparison, i would take snake oil anyday of the week than horse urine.

To each his own... lol


http://en.wikipedia.org/wiki/Snake_oil

Leisa said...

I wrote this last night, but I don't see it here. I must not be able to enter those %^@#$!^$!^ authentication numbers properly! My post went something like this...

Toshi, this entry will earn you poster child status for developing a trading/investing style that is suitable to your own individual proclivities. AND, you have the courage to be comfortable with that style despite the hecklers that somehow want to cure your bear, reprobate ways.

Humble1 said...

Beanie - you missed the point - it wasn't the snake oil that sold snake oil, it was all the benefits of snake oil that sold it. It makes no difference whether it did everything it was supposed to or not. The people who bought it feared losing out on those benefits. Bears sell fear daily. Once in a while they get a decent entry in an established up trend. Makes for good copy on this blog to appeal to the impulsiveness of the masses.

wattson7 said...

Ok, Back to business... Anyone trading the NZD. The US dollar is crashing. I am making some big coin.. BTW bad news for the Carry trade issue. It hasn't gone away...

The Finance Dude said...

Tim,

Since I was young, I've been fascinated with finance and yet at the same time saw it's fallacy. There is only so much resources endowned upon this planet, and as much as any bull will disagree, there will be an end to new resources being pulled out of the ground. Even recycling will lose parts in the process.

Endless growth does have an end, we just dont know when it's going to occur. Oil is the trump card however. Oil is the engine of growth for the past hundred plus years. Oil basically equalls EVERYTHING else on this planet. Once the cheap oil is exhausted(now), life gets really hard for the now 6 Billion PLUS people. Peak Oil is here. KSA is down nearly 8% and the wall of worry is about to arrive, check the charts.

Thomas said...

"Your buddy Dennis from MarketMax days" needs to be schooled on fundamentals. Who knows about his technics capabilities?

In any event, the "subprime problem" could be meaningful. But it's not a subprime problem, it's a mortgage problem. Get yourself out of the subprime bucket and think about how waning demand effects housing prices, how housing prices effects wealth, and how higher cost of money effects demand of consumer goods. The real problem is not the "massive debt carried by both the US consumers and the US government." U.S. debt was never the issue even when it was a higher percentage of GDP. Nor is consumer debt the issue when unemployment is going down and wages going up. Be Chicken Little on some other website when you talk about SS and Medicare.

2. "The US dollars will suffer a massive devaluation because the foreigners will dump dollars" OK. Where will they go? The renminibi? The shekel? The kopec? Oh...the euro? Right. If the dollar gets "massively" devalued it will be because of runaway inflation or U.S. default. There aren't enough safe havens with that kind of liquidity outside the U.S. Or didn't they teach you that in college?

3. "No economy will be safe from the coming US recession/depression because they depend on selling their stuffs to US consumers." Really. What to do with this? If anything, the U.S. is in a soft spot right now with an asymetric wealth effect creeping into consumer psychology because of housing. Consumer demand is in a lull. Watch the EU (finally!) pick up the slack. The ECB keeps hiking rates and yet the Continental economies roll on. A few countries are passing competitive tax cuts. Real estate and consumer demand is percolating. And look at those charts! EWQ, EWG, EWI retraced fully the last downturn; compare with the SPY and the DIA. The U.S. indices may cede leadership; but bear market? Bring me a good technical argument.

Hey, at least, your buddy Tim makes an attempt!

red95king said...

Sounds to me like Tim is bitter about missing the 2000-2003 bear market as well.

haraldbange said...

Hi Tim

I see on the TOS platform that you are a "Chicago bear" this week.

Looking forward to your 2 hour session on TOS chat this Wednesday.

Your book is great.

Hal

JakeGint said...

Oy vey finance dude, save the gloom and doom for the college co-eds. Take some econ with your finance classes, and you will note that commodity prices are dictated by supply and demand. Oil will become too expensive to purchase long before it stops coming out of the ground, and this will force substitutes into the market to replace it as a fuel source. Have some faith in your fellow man, and the march of technology.

Hasn't let you down yet, has it?

Broker A said...

Great stuff.

No, really, just kidding.

But, seriously, I'm joking.

IIO said...

I don't think personality is a good reason for being a bear. I have the same worrywart/unconventional qualities, myself, and I am sure the market could care less.

I really like Louis' comments above. Maybe its best to try and acquire that mindset where one is neither bearish nor bullish, but you one with the market. Like an athlete in the "zone". You don't think, you just do.

gappingandyapping said...

Looks like you have done well over the past few years being a bear, why go where the money is being made anyway when you can lose it on the bear side? Figures your from California, grizzlies and pessimists are made there. Are you short your 401k too?

Dogwood said...

If its going up, go long.

If its going down, go short.

If its going sideways, stand aside and wait.

Why marry one side or the other when you can make money going long or short?