The Novice Bear

In Mr. Rithotz’s latest week in preview linkfest, there is a link to an article in The Gaurdian that gives a quick review of a new book called “The Black Swan”, by Nassim Nicholas Taleb. Here is a little excerpt from the article.

Markets tend to work on the basis that Black Swans either don’t exist or appear with such irregularity that they are not worth worrying about. As a result, traders in the City of London went home on the night of August 3 1914 seemingly oblivious to the fact that a world war lasting more than four years would start the next day. Similarly, there was not the slightest suggestion on Friday October 16 1987 that the Dow Jones would lose more than 20% of its value the next Monday. The Nobel prize-winners Robert Merton and Myron Scholes, who put together Long Term Capital Management and convinced their investors that their models made it a sure-fire bet, had failed to factor in the possibility of a Black Swan - in the case of LTCM, the Russian debt default in August 1998.

I’m sorry but I simply do not agree with the author at all. To someone on Main street the crash of 87 might have come out of nowhere but not to the top players on Wall Street. Many of these players were interviewed by Jack Schwager in the first of his excellent “Market Wizards” books. The interviews took place not long after the crash and were very fresh in the minds of the traders. Almost all of them were expecting a large turn in the market and were well positioned for Black Monday. The only exception was the one trader that shunned technical analysis (he was trounced that day). I do not have time to post their comments tonight, but will try to do so in the near future.

Here is an interesting poll. In honor of the 20th anniversary of Black Monday, MarketWatch put a poll together. Although this is not scientific, I still like the fact that there is a ton of skepticism out there regarding the market’s rally. While this blog is called The Novice Bear, I have been net long since September 4th after covering my shorts on August 16th. A poll like this makes me happy to be a bull.

Sometimes its too easy to be bearish. There are so many reasons to believe that the market will unravel and it seems that being a bear is the smart thing to do. The plain simple fact, however, is that it pays to be a bull. I learned this from Ken Fisher.

He is not a perma-bull by any means, but he realized long ago that the market can rise in the face of much worse things than what we face today. Get this, the market rose 20.3% in 1942, 25.9% in 1943, 19.8% in 1944, and 36.4% in 1945! Just imagine all of the bears that were burned during those years. Fisher writes, “Historically, if markets have been positive 71% of the time, and some of those negative years were only down-a-little, you’re looking at very few years of truly scary, bearish, down-a-lot type.”

Take a look at the S&P 500 chart and the calls Fisher has made during the last decade. It is pretty amazing.

I really dislike Elliot Wave “theory”. First of all, as a scientist I hate the misuse of the word theory. (Dow theory is guilty of this also.) A theory is a self-consistent model for describing the behavior of a related set of natural phenomena. In this sense, a theory is a systematic and formalized expression of all previous observations which is predictive, logical and testable. You want to see how predictive Elliot Wave “Theory” is? Take a look at the predictions by the method’s most famous practitioner. (Click on the picture for a larger view) This was taken from http://www.cxoadvisory.com/ and, as you can see, Prechter’s predictions are horribly wrong. I can only hope that with such a awful track record that there aren’t very many people who still pay attention to his newsletter.

How long can someone stay bearish? What would it take for him to turn bullish? Would such a moment mark the ultimate top of the market?

Here are two more S&P charts that show weak volume on the recovery.

I have no plans to go long with K-Swiss, but the charts do look interesting. Both the weekly and daily charts have completed perfected TD Sequential countdowns. I’m posting this mainly as a reminder to myself to see how DeMark’s indicator does with this hated stock.

Being an apparel maker, VFC probably isn’t the first stock that comes to mind when thinking about going long. I have to say, however, that the chart is looking pretty good. Its long term trend is up (see weekly chart below) and it just finished a TD Sequential countdown. It had a sign of strength a few days ago and has sold off the gains, which tells me that there is a big seller still. I would wait until the TD Sequential is perfected, which would require an intraday low that is lower than 78.72 while simultaneously closing lower than the close two day previous. If we get that then it might be worth looking in too.