Wednesday, January 20, 2016

Bear Trap?

With recent stock market sell-off, I encounter two sets of popular recommendations. For those who are bullish, "don't scare yourself" and "buy the dips" are their favorite recommendations and they see price drop as an opportunity to add to their position. On the other hand, for those who are bearish, "sell the rallies" and "it's now time to exit the stock market and buy the bonds" are the two most typical recommendations. Whose voice is correct?



After reading Adam Hamilton's "Bear Trap for Bulls," I wonder how many investors listened to his warning about the danger of the tech bubble. Now that we are in a far bigger bond bubble, I am just curious if his 2000 article has something to say this 2016. Here's two paragraphs from his article: 

He said that both investors and traders forget "that just as real life bears are extremely intelligent and cunning, so are bear markets. The 'goal' of the bear market is to lure as many bulls as possible to their doom. In order to accomplish that devious stratagem, a bear market usually takes years, slowly breaking individual investor sentiment over the inquisitor’s wheel of ever accumulating losses. The initial drop of the DJIA in 1929 from 381 to 199 was 48%, and took about two months. . . Here is where it gets REALLY provocative. From the temporary bottom of 199 in November 1929, the DJIA retraced 55% of its losses, closing near 300 in April 1930. The bull was back, right? Wrong! Contrary to a cacophony of bullish predictions, the DJIA plunged into a gut-wrenching dive and burned in over two years later. DJIA 300 would not be seen again until 1954, an amazing 25 years after the dead cat bounce!"

"I suspect, in the light of history and investor psychology, a big, hungry, and mean bear is hiding out in the rocks surrounding the financial markets. He is up high and out of sight, and is silently licking his chops, a blood lust in his eyes as he eagerly salivates over the fat and tasty walrus tech stocks lounging below. Always retaining the crucial strategic advantage of surprise, he will strike when the timing is right for him, and when the perceptions of safety in the tech herd are the strongest. He hasn’t eaten for almost thirty years, and his rage continues to multiply exponentially. He is biding his time, laying in stealth, and the walruses have no fear. Make no mistake, however, the bear will have his way when he considers the timing right!"

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