Wednesday, December 8, 2010

The "NEW FEAR" Phenomena

Running a trading service and also being an active participant on twitter and other trading social circles I cannot help but notice a very unusual kind of 'FEAR'. This 'FEAR' is a fear that is very unique in it's nature. Fear during bear markets or fear that is seen after a market goes thru a nasty pullback is normal and to be expected many times. That is not really the kind of "FEAR" i am trying to explain here. I am seeing FEAR amongst traders that a "BIG CORRECTION" is gonna start SOON! Even tho, the indexes had made a huge move off the August 2010 lows, you'd think the majority of traders would be drunk with profits and exuberance but that is NOT really the case right now (not in my humble opinion at least). I still notice that traders are much quicker to turn bearish when any hint of selling starts to manifest itself. There are two kinds of traders that i am noticing right now:

A: The trader who wants to see big pullback so he can buy stocks at less 'risky' levels.

B: The trader who thinks this rally is complete 'bullshit' and will top out any day now and cannot wait to short this thing to it's miserable death.

The traders who think that pullbacks will be very shallow (and as a matter of fact, dips of all sorts need to be bought up because we are going HIGHER, possibly even much higher), well these types of brave souled traders are actually the minority. If i am wrong, please leave a comment and explain your views! I would love to hear your thoughts on this phenomena!

I ask myself everyday: "What is the 'HARDEST' TRADE TO MAKE TODAY?"

What trade right now would make the majority of people most nervous??

During the last correction we just saw 2-3 weeks ago, the SPX pulled back only 4% yet many traders, many experienced traders whom i truly respect turned very bearish. This kind of sentiment is very fascinating to me. During major tops or starts of a big corrections or bear markets: The Exact opposite phenomena is seen! The indexes pullback yet the majority of traders brush off weakness and instead keep buying into weakness without "FEAR", only to see the indexes continue to break down more and the denial of a major trend change is alive and well. I have seen this phenomena first hand numerous times in my trading career! It's kind of a scary thing to see to be honest. There is a sense of disbelief that a big pullback is gonna happen. People keep buying dips with reckless abandon only to see further deterioration in assets week after week. It typically takes a long time before these same traders start to recognize that a major shift has happened but by now it's way too late and lots of $$$ has been wasted.

I must say, that ever since the 2008 bear market and ESPECIALLY since May 2010 Flash Crash that the post bear market and flash crash trauma has instilled a "FEAR" that i have never seen before. There is FEAR out there that anytime we see the market pullback that a major breakdown is looming and it's time to run for cover and initiate short positions because SHIT IS ABOUT DROP OFF A CLIFF! Am i alone in thinking this?? Please weigh in your thoughts, leave a comment on this post.

I will recommend here what i recommend to my fellow ART OF TRADING members and that is TO KEEP IS SIMPLE!! Do not over think it! Trust me, "OVER THINKERS" have either missed this entire rally or have been shorting this monster since March 2009.

Who cares what your beliefs are about why this rally is taking place!

Who cares how much percent we moved off the 2009 lows!

Who cares if US unemployment is 10% and going higher!

Who cares if the rally is on low volume!

Who cares if...blah blah blah.... You get the point.

All that matters is the charts and what are the charts trying to tell us RIGHT NOW!

If the market is not pulling back much before moving back up, it's telling you there is a bid under the market. Big money are ponying up their $$ to get in on dips.

If traders turn bearish quickly and talk about 'doom and gloom' (i.e. Korean wars, European debt crisis, unemployment numbers, NFLX CEOs resigning etc etc) after the indexes pullback 0.25%, it's telling you that FEAR is still rampant and as long as FEAR is still high as the market grinds higher than this wacky market will likely keep going higher!! Sounds crazy doesn't it?!

Look eventually the market will top out big time and we will see the pain that many are expecting but i am not see this yet, not in my charts at least!

This is what it's all about: Read between the lines.

TUNE OUT ALL THE NOISE! Noise causes EMOTIONAL decision making. Noise wants to shake YOU out! Noise wants you to make all the wrong moves.

Focus on the market's action and the markets true intentions near support/resistance.

What is the market trying to tell you in it's typical subtle, enigmatic, discreet manner??

Read between the lines: What is THE HARDEST TRADE TO MAKE RIGHT NOW??

I really hope this post helps you in your trading.

Good luck and trade em well folks!


doglas said...

Always enjoy your posts!

Is it possible to be all of those types? I think the rally is bullshit, I think pullbacks will be shallow in the short and intermediate terms, and I would gladly buy a "big pullback."

The brain tells me to be bearish, but the charts suggest otherwise. My brain has never been smarter than the charts.

La Boluda said...

Great post, I've been thinking about this for a while...
As long as there is fear around, we should not crash. The famous "wall of worry".
I think there is much of "recency bias" related to the previous crashes, so the traders' minds are leaning bearish and maybe that is fueling the bull right now.
But it would be interesting to see what is the feeling of the rest of the people, not only professional traders, bloggers, etc.

Curtis Faith said...

I follow the charts for my trading and it has twice signaled one of my favorite shorts in the last month. Once last month when the April/May highs were tested and failed to follow through and today when we dropped below yesterday's low.

As a trader, this makes me short. But I'm swing trading so I don't have to worry about long-term perspectives or even medium-term perspectives.

Price is king because it reflects market psychology.

Dave Narby said...

Emotions don't have Jack shit to do with it any more IMO.

J6P is mostly out of this market, it's just the big players looking at the macro picture.

Right now, it's all about the EU, and whether Germany is going to write checks to save the Eurozone periphery.

Some are thinking China will bail out Europe. I think China has it's own problems, and I'm not sure they will decide saving Europe is in it's interest.

It's all about the EU right now

K said...

For what it's worth, I'm looking at the last COT report for the E-mini :

I don't see either bullish or bearish side taking precedence here.
Non-Commercials (Large Specs, pro-traders) are short. Non-reportables (Small Specs, dumb money) are also short. Commercials are neutral.

There's not much here to make a firm conclusion. If one side were significantly tilted in difference to the other than there could be grounds for making a case.

As for now, it looks like the market could just chop for the intermediate term until this sorts itself out.

Kshitij said...

Very good post. Yes- watch that fear. It answers the trader's longer term question- this is probably a uptrend market.

liviufx said...

a great read. Already sent it to all my readers.


dossfarms said...

Stewie, much respect for you and thanks. I think peoples problem with the market is the unprecedented amount of manipulation and interference by the government. They own stocks in public companies! Then there's all the investigations and threats of more of the same. Traders don't want to be partners with the Fed. They want to invest as they see fit. I for one feel manipulated by the Uncle Sam. Thanks again RD

Steveo said...

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