I Know What They’ll Be Thinking

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As difficult as the stock market has been for equity bears over the past three years – – and as many false starts as there have been to the resumption of the bear market – – – there are a few hard truths which no sane person can deny:

+ There will come a point (if it hasn't happened already) that the market reaches a peak and begins a meaningful drop to much lower levels;

+ There will come a point (and, again, it may have happened already) that the reckless creation of new liquidity is forced to come to a halt, no matter how much the bulls want it to continue indefinitely;

+ The core changes that are coming at the end of this year in the political and legal scene will have a macro effect on the economy (specifically, much higher taxes, including far higher capital gains and dividend taxes, as well as a liberal President who will be completely liberated to do whatever he wants without any concern for any future election……….to say nothing of the debt, which has reached so many tens of trillions at this point that the figures have become meaningless)

I remember what it felt like to be infallible. I remember making giant triple-digit percentage returns within the space of weeks, and that wasn't even through the use of options or leverage. I remember saying – out loud – "this is like printing money" – during the trading day. I even remember handing out hundred dollar bills to homeless people in Palo Alto, just for the hell of it, after a good day.

But deep, deep down in my subconscious, I must have known a change was at hand. If you read this post from early March 2009 (which, need I remind you, was the market bottom), you will see that I immediately declared at the start of the post, "I am uncharacteristically in a funk." Perhaps the wisest part of me – – which, all too often, I cannot consciously access – – knew that all the good times and easy money were drawing to a close.

Even though the market bottomed, things were still pretty good through June, and then the world began to show that it had truly changed. 

I have been thinking about this, because – – whenever the market DOES stop going up and starts going down in a sustained way, the bulls are going to experience what I went through. 0404-sentiment

The first phrase will be a kind of frustration that all the easy money and flawless execution isn't happening anymore. AAPL stops going up $10 day in and day out. IPOs no longer excite people. The government isn't handing out the free goodies like it did before. As a bear, I experienced this frustration in the summer of 2009. I was still doing OK, but the magic seemed to be gone.

The next phase will be when the market is, plain and simple, going against them. The trend will be undeniable. The market will no longer be simply frustrating; it will start eating up their money. Their trading accounts will shrink. In spite of this, they will keep trading against the trend, mainly because they had been so accustomed to doing well for such a long time before, they figure the trend will resume in their favor any moment now. This was my experience from the autumn of 2009 to the spring of 2010.

And then they will get relief. After suffering for a while, things will start to go their way again. They'll start making some profitable trades. And all the anger they've been choking back will be released, and they'll feel it's time for revenge. Indeed, after a while of getting their way, they'll be ready for blood again.  For me, this lasted from May 2010 to the end of August 2010.

And then – blammo – out of nowhere – the trend will resume against them in such a violent and unexpected way that they'll want to crawl under the sheets in bed and stay there. That date, for me, September 1, 2010, is one I don't even have to reference in a chart. It's a day I'll never forget, since it was the worst trading day of my life. It's also the day that I instilled a contempt and hatred for Bernanke unlike anything I've felt for any human in my life. It left me irrevocably scarred.

Who knows what the bulls' "Bernanke event" will be. Of course, the big difference between laying out this tale on the bullish or bearish side is that the bears don't have friends crammed into every bank and Federal Reserve office. We're on our own. But there will be something – – a person, an event, or some awful fiscal reality – – that will represent the bulls' Waterloo.

At this very late stage of the game (as I said, we've been living with this for three years now), I have at least adopted caution and hesitation (perhaps to a fault) in order to avoid ever suffering any "September 1" event again in my life. It's still too early, I think, to be aggressive.

But, trendline by trendline, moving average by moving average, as things tip back to cold reality, it'll become logical again to be aggressive. And, when the happy day comes that the bulls are mounted with the oppressive yoke which has for so long been their turn to wear, I'll know what they're thinking. Because I've been there.