Bears Galore, from Phil McDonnell

April 3, 2008 |

Bears Hedgefund monitoring service Greenwich Alternative Investments reports 58% bears on the S&P, 58% bears on the dollar and 67% bears on the 10 yr T-Notes. Sentiment is overwhelmingly negative.

Nigel Davies replies:

Seems odd that these learned gentlemen would be so bearish on both the dollar and the S&P. I would have thought there'd come a point at which a weak dollar would start to get good for exports.

Jim Joyce writes:

Sentiment stats must be tested. One can't just glibly assume they are contrarian indicators.

Victor Niederhoffer remarks:

The key to this market was when Abbey Cohen refrained from making any more bullish forecasts and it was accepted that we were in bear market by Goldman itself.

Stefan Jovanovich explains:

Measures of the current cycle need to include adjustments for the change in the value of the dollar. If those changes are included, the S&P 500 at 1374.9 is still down roughly 25% from its 12-month high on May 29th of last year and down 7% from its 3-month high at year-end. One could argue that the "bear" market is still intact — given that the S&P 500 adjusted from the value of the dollar is down 60% from its high on August 30, 2000 and up only 17.3% from its low on March 3, 2003. Comparisons with 1938 seem appropriate when looked at with this particular historical lens.

Nigel Davies agrees:

It is helpful to consider the value of assets relative to other assets rather than just the dollar. The dollar is by no means a fixed entity, though when one talks about 'bottoms' or 'tops' in assets like stocks or gold, there's an implicit assumption that it is.

J.T. Holley replies:

The dark clouds cover only the Big Apple. The dark and dirty forecasts are associated with NYC. My assumption is cutbacks, losses, write-offs, and a slowing beat of the heart of the financial world. Outside NYC, in beautiful Brentwood, TN where the buds are blooming, daffodils sprinkle the green fields, and opportunity is much appreciated, I'm as bullish as ever. It seems that far and few are remembering the drift, that bear markets exist only by looking at the rearview mirror, while one is driving forward utilizing the windshield to block the bugs and grit.

Kim Zussman reports:

Yesterday was third highest first day of month in 14 years (SPY c-c). Those >3% gain were, on average, followed by gains the rest of that month: FDOM

Comments

17 Comments so far

Anatoly Veltman on April 2, 2008 9:33 am
CFTC Commitments of Traders (C.O.T.) as of 3/25 settlement 1.5530 Jun EUR agrees with your observation. Compared to preceding report as of 3/18 settlement of 1.5637, Commercial positions reduced 6,425 longs and added 8,914 shorts. This is unusual for price decline: I call it “C.O.T. bearish divergence”, best type of signal you can distill out of CFTC data (caveat is that price change here is not huge; also that most FX commitments happen to be off-exchange). On the other side of Commercial bear: Funds added 12,545 longs and reduced 3,604 - indicating rampant bullish EUR sentiment.
steve leslie on April 2, 2008 12:23 pm
The contrarian advice indicator always befuddles me as to how one takes advantage of it. I am trying to reason as to why this seems to work.

The argument that bears use to support their thesis is that the money that is available to purchase stocks is used up. Therefore there is little more available capital to send into the financial markets. So the market runs out of fuel, gets tired as as it weakens those begin to cash out and then the market takes on a self-fulfilling prophecy and drops often precipitously as we have seen these last 5 months.

Now does the same hold true on the other side. That is to say that short positions get strapped to the maximum, they ultimately have to be covered and after the capital is used up the shorts scramble and once again the market rallies off lows.

Or could it be a simple as the majority is usually wrong and since man likes to run in packs and most are followers rather than leaders, they become predictable when it comes to large numbers, and thus they are classic prey who are easily caught in ambushes and leave it at that.

I personally like to side on the Behavioral finance theories, and look for instruction toward this area. Reference Dr. Hersch Shefrin and his books for great insight.
Lon Evans on April 3, 2008 3:05 am
Nigel,

BLACK SWAN.

The world is no longer your father's Oldsmobile.

Creative Destruction and our old friend Schumpeter!

My, how soon we dismiss.

lon
Nigel Davies on April 3, 2008 1:03 pm
Lon,

Well if you’re bullish on some enourmous Black Swan hitting civilisation as you know it I suggest you buy goats with what’s left of your positions instead of continuing to trade. If it isn’t a Black Swan then you might get wiped out yet again. And if it is your winnings probably won’t be worth anything by the time you come to cash them in.

BTW, don’t go for the alternative of becoming a cobbler as this requires not offending your customers.

Nigel
George Parkanyi on April 3, 2008 7:05 pm
If you don't care at all which way the market goes, what would that make you? slothish? baboonish? donkish? Amish? … help me out here, OK?
Old man Partridge on April 3, 2008 9:31 pm
Isn't it time someone called Lon on his Asperger's Syndrome and raised him a Tourette's? Lon, speaking of black swans, I made ten billion dollars this year and rode unicorns. Just thought you should know.
Lon Evans on April 4, 2008 2:22 am
To all the 'crabs,'

Yes, I'm still short. Nigel attempts to criticize me for the supposed prediction of my perfect cover. Once contradicted, the fool instead attacks with "what's left of your position."

Oh Nigel, lets talk. I'm in the perfect position, and have been for a bit of time now. When the market rallies, I take a hedging position equal to my short. If I'm wrong, I suffer no loss. If I'm right, I bank bank.

To date, my spread sheet thingy tells me that I've been banking bank to a degree that even if I closed the core short flat, I'm well into the money.

Further Nigel, my stop is set at 1410. That insures me a profit of exactly 50 handles on the position. You are [someone I dislike]. And I'm, well, banking bank.

Go back to checkers, or what ever it is that suffices you insufficient ego.

lon
steve leslie on April 4, 2008 9:01 am
I just saw the jobs report and by all indications it is a poor showing. This as we are reminded is a backward looking number prone to revisions. The dollar continues to be very weak. Reminds me of the game of Limbo (how low can you go) Looking forward is the stock market, figuring out where the future is. Thus for now the market is carefully confident that things will improve later in the year. The market will struggle against a weak economy esp if depressing economic numbers continue to surface. this is my view.

What I found interesting in looking at the worst quarters as reported by Dr. Phil is that they coincided with commercial real estate events and recession in 1990, LTCM in 1998 and 9-11 and woes in the 200's and residential real estate and credit crunch in 2008. In each instance the federal reserve was active and successful in injecting capital into the system to stem the tide and turn the ship around.

It might be in the middle innings of a baseball game and the starting pitcher (Ben Bernanke) is tiring. Now it becomes the job of the set-up man(congress) to put forth some positive legislation in the form of tax relief, stimulus packages etc. to allow the closer(New President) to take over and move things forward.

This may be a weak analogy but after all we are only one week into baseball season and The Yankees(the evil empire) may still make the playoffs.

sl.
Nigel Davies on April 4, 2008 10:31 am
Lon,

You seem to be getting a bit hot under the collar. And that 50 handles seems a tad shy of the 250 you were announcing a short time ago…

Hope all is well.

Hey everyone, let's bid it up to 1410.25 and take out Lon's stop!

Nigel
John on April 4, 2008 8:32 pm
I took that Greenwich Alternative Investments macro sentiment data (dating back to January 2004) and calculated correlations but didn’t come up with much interesting, at least not anything predictive.

There’s not a significant correlation between sentiment levels in the USD, 10-year Treasuries, and S&P 500 and how their respective prices move over the next month. (These back of the envelope calculations are inconsistent with the conventional wisdom of using these sentiment results as a contrarian indictor.)

The one mildly interesting result was a very high positive correlation (+0.6) between how USD (my calculations were on DXY) just moved and what sentiment was afterwards, i.e. if USD just went down a lot so people are now very bearish on it. Suggests that either consciously or not people trade currencies with a trend following bias.
Lon Evans on April 5, 2008 2:46 am
Nigel,

Not 'hot under the coller," just laughing all the way to to bank.

lon
Nigel Davies on April 5, 2008 12:33 pm
Lon,

Many congratulations on what appears to be a good trade for you. But to put your continually boasting and abuse into context, one wonders if this is your first winner. You have already noted that you’ve gone bust twice, many people here have never gone bust and indeed made money continually from their trading.

So congratulations again, and I do hope your good fortune continues to the point at which you have the confidence not to behave as you do.

Nigel
Lon Evans on April 6, 2008 3:29 am
Oh Nigel,

Give it a rest.

lon
Nigel Davies on April 6, 2008 10:47 am
Hey Lon, You're behaving exactly like weak players who suddenly find themselves doing well in a tournament. It's too much for them to handle. The difference with trading is that with nobody knows everyone else's results are. Lucky for you and your meaningless posturing, especially if you've been shorting for a few years. Nigel
Nigel Davies on April 6, 2008 12:45 pm
Lon,

Here, btw, is some free advice that I’m sure you won’t take until it’s too late. Probably you’ll take it as an insult but in fact I’m doing you a BIG favour:

a) Give up trading, it’s not for you. You’re clearly an amateur what with your excitement about the prospect of 250 handles and your advertised stop at 1410. Sooner or later you’ll be taken out again.

b) Don’t try poker either.

c) Forget about shorting. Go long some index funds and buy more (maybe some tech ones) during panics. Never sell.

d) Find an interest outside of trading, maybe by getting out more and trying to be nice to people.

No need to thank me.

Nigel
Lon Evans on April 9, 2008 2:59 am
Dear Nigel,

Why would I thank a crab who knows only to pull down? And as my short has been perfectly profitable, why should I embrace your advice?

You may be quite intelligent, but little I’ve read of your thought processes in the a last few months supports the supposition.

Go back to the board games. From what I understand, no money is risked, only ego. Apparently, you’ve ego to spare, but little money.

I play money, and risk it. I don’t see you to be the best of mentors.

lon
Nigel Davies on April 10, 2008 9:06 am
Lon,

I suspect that overall in your ‘trading career’ you’ve lost heavily, despite this short working out so far. Of course we won’t get to see how much you lost when you went under the first couple of times.

It looks like you’re beyond salvation, so enjoy it while it lasts.

Nigel

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