Among the body of the trading populous, there is surely a subset of folks that are bearish and wanted to short the devil out of the market once a huge bounce took place, and now they are furious with themselves for having missed the boat.
I'm not in this camp, but I'm certainly partly angry with myself for not being even more aggressive. This is effortless to say in retrospect, of course. Had the market been up 268 points instead of down the same amount, I would be upset with myself for very different reasons! As I've said many times – and will say many times more – traders are rarely happy.
I don't blame the folks that held back, though. I was mentioning "the bounce" repeatedly recently. Well, I think we got our bounce. When, you ask? Monday and Tuesday! Yep, that was the big bounce! Whoop-dee-freakin'-do!
The psychology that has caused would-be bears to hold back………and caused your long-suffering narrator to not be as aggressive as he might have been………has easy-to-identify origins. Let's face it, for the past ten months:
+ Every dip was a buying opportunity;
+ The government clearly was not going to let equities fall;
+ Goldman Sachs wasn't going to let equities fall;
+ Short positions were good for one day; two days, tops;
+ Just like in the movies and on television, we all knew that things were going to work out fine in the end.
It is my contention that the reality has changed. My response to the above five points is:
– Rallies are now selling/shorting opportunities. The kind of event we saw on Monday/Tuesday is a gift to bears. I understand Cramer was jumping all over the place with excitement on Tuesday after the close. That makes sense, given the man's track record and the psychology of the market.
– The government has bigger fish to fry than the stock market. The doe-eyed optimism from just one short year ago is utterly gone, and I imagine Obama might be quite content to leave the office after one term, Lyndon Johnson style. It's going to be a job that nobody wants.
– If there is one homogeneous religion on Wall Street, it's the worship of money. Goldman cares about profits and profits only, and whether it's the short side or the long side, they're going to make profits happen.
– Closing out short positions after one or two good days can produce some quick and tidy profits, but meaningful profits require some patience – – and some tolerance for swings up and down. I've been sitting tight on my shorts, even though days like Monday and Tuesday make it a bit nerve-wracking.
The fifth bullet point – – about how everything is going to work out just fine – – is something that simply isn't true. The video-saturated public gets accustomed to Happy Endings, because that's how things are supposed to go. But think about the everyday people of Germany in 1935………..or American in 1860……..or Japan in 1940………or China in 1949. These were regular folks, not much different than you or me, just trying to provide for their families, live their lives, and get along. Do you really think the fact they didn't expect the horrors that awaited them around the corner made any difference? Of course not.
We are living in a slow-motion train wreck, and no one knows how the movie is going to end. I do believe, however, that even though no one on the planet knows if the environment we're going to find ourselves in is going to be (1) deflationary, or (2) inflationary, neither of those scenarios is going to produce a happy result. In other words, we know things are going to end badly. We just don't know which flavor of bad.
In the meantime, tomorrow is going to be much more interesting than your run-of-the-mill trading day. There is no reason at all the Dow won't move up 300 points. There also isn't any reason it won't move down 300 points. Irrespective of what it does tomorrow, I think a new general trend is in place, and I think everything changed starting on January 20th, no matter what the next few days holds.
