Bear market question for the experienced

[wjk]

For those of you who were trading 87, early 90's, and post 9/11:

I began my trading career at the start of the latest bull run. I was prepared to go into long term shorting when the markets were still in rally mode...because of the sub prime issue looming.

Went well until the first short blowout by Uncle Ben's 1rst emergency rate cut. Kind of fucked up my strategy, as I got hurt by that (pretty bad). My results since have been a mix of long and short gains and losses.

My question is:

Was there this much government intervention in previous bears?

I always thought that the best medicine was to let the system clean itself out through natural corrections...in the market...and in the economy. This is my first bear. I gambled on a rate cut the other day because that has been this guy's MO, and needless to say, paid for that gamble. I guess the government must be factored into strategies, but when I do, it feels a lot like gambling. Moving into the e mini's when things calm, as I'm really getting tired of stock vulnerabilities.

 

[lindq]

Quote from wjk:

I gambled on a rate cut the other day because that has been this guy's MO, and needless to say, paid for that gamble.

Sounds like your entire approach has been based on trying to time the market and various instruments based on your "feelings". ALWAYS a bad idea, and especially now.

You need to develop a systematic approach and stick with it with discipline.

Regarding Fed intervention, this is very unusual and not a character of bear markets. It's due to the problems in the financial sector, over which the Fed can have some impact. (They hope)

The other difference here is that both 1987 and 9/11 were very quick hits to the market, with strong, fast recoveries. They were quick corrections, not bear markets are we are now experiencing.

And yes, you are likely better off moving to index futures rather that screwing around with equities.

 

[nazzdack]

Quote from wjk:

Was there this much government intervention in previous bears?

[/B]

1) No.
2) Then again, in today's environment, there's a lot more derivatives-related activity that didn't exist in the past.
3) The degree of participation, (i.e. individuals, institutions, banks, funds et al), is much larger than prior bear markets.
4) The appetite for risk and leverage is much greater than in the past.

 

[Cutten]

Yes there is often intervention from Fed rate cuts, or "jawboning" (comments trying to prop up the market). This happened several times in 2000-2002, most notably Jan 2001 which sparked the fastest/biggest ever rally in US stocks (up like 7% in about 30 seconds - some tech stocks were up 30%+ in a minute) and killed some shorts. I wasn't trading in 1987, but there was intervention there too - Greenspan cut rates, and corporations announced massive co-ordinated buybacks. Basically whenever things get really dicey, plan for intervention at some point.

The thing to bear in mind is that these interventions usually take place when there is palpable fear in the air. They prefer to stay hands-off until things seem really bad. That's why it's always a good idea to cover some shorts once you start to feel people are panicking. In the later stage of a downmove, never have outright shorts, only puts, that way you limit your risk.

For example I'm bearish right now but all my position is ES puts and a few other stock puts. If the Fed slash rates to 0.5% and the Treasury buys $50 billion of stock index futures, I will get hit but I won't get hurt too bad. And if it goes a lot lower and people panic, I will be scaling out, locking in profits and letting part but not all of the position run.

One good signal to start exiting is when the lead story on page 1 of non-market newspapers is about a stockmarket meltdown. If that happens, you *must* cover in the pre-open or globex ES overnight, because the Fed often moves before the bond futures start trading at 7:20am. 7am-7:20am is the danger zone for govt/Fed action after a panic move down.

 

[Pa(b)st Prime]

Quote from nazzdack:

1) No.
2) Then again, in today's environment, there's a lot more derivatives-related activity that didn't exist in the past.
3) The degree of participation, (i.e. individuals, institutions, banks, funds et al), is much larger than prior bear markets.
4) The appetite for risk and leverage is much greater than in the past.

Another great post Nazz.

If I could add one more thing: The proliferation of off the run debt securities- i.e. all this mortgage stuff-presents an untested challenge to government sponsored bull forces. Propping up stocks via the massive purchase of index futures or by enlisting specialists is one thing but this markets weakness isn't from the equity side it's from the fixed income side. Providing these troubled mortgage backed securities a bid isn't as easy as clicking a mouse in the buy column. Reduced cost of carry is an impotent lure to potential buyers who anticipate many of these issues plunging to zero.

 

[wjk]

Quote from lindq:

You need to develop a systematic approach and stick with it with discipline.

For the most part, my approach has been pretty simple. S and R, trend, and buy, sell setups. Nothing like having a nice short making money at the close, and waking up to a crushing loss because the fed decides to play the market instead of the economy. When he did it again, I started thinking about it, too much. I guess by letting that intimidate me, and trying to factor that into a simple strategy is the same as trading on emotion, or trying to see where the market might go, as opposed to where it actually is going. I appreciate your insights very much. Thankyou.



Thanks to all.

 

[crgarcia]

Quote from wjk:

For those of you who were trading 87, early 90's, and post 9/11:

I began my trading career at the start of the latest bull run. I was prepared to go into long term shorting when the markets were still in rally mode...because of the sub prime issue looming.

Went well until the first short blowout by Uncle Ben's 1rst emergency rate cut. Kind of fucked up my strategy, as I got hurt by that (pretty bad). My results since have been a mix of long and short gains and losses.

My question is:

Was there this much government intervention in previous bears?

I always thought that the best medicine was to let the system clean itself out through natural corrections...in the market...and in the economy. This is my first bear. I gambled on a rate cut the other day because that has been this guy's MO, and needless to say, paid for that gamble. I guess the government must be factored into strategies, but when I do, it feels a lot like gambling. Moving into the e mini's when things calm, as I'm really getting tired of stock vulnerabilities.

All bear markets are temporary.
Rarely last 2 years, the long trend in stocks is still up.

This said, be aware that nobody, absolutely nobody, may catch the exact bottom, this is just an utopia, this just doesn't happen.

What you may catch, are levels low enough, in the latter phases of the correction/bear market, so you end up making money in the long run.

 

[IShopAtPublix]

This maybe a no brainer comment but best advice is to forget "buy on the dips". Frequently people in a bull market think they are so smart when they buy a stock when it stops falling and then subsequently goes up. That does not work in a bear market. Don't catch a falling knife.

 

[gnome]

Quote from wjk:

"... Was there this much government intervention in previous bears?.

I remember when the Fed cut rates in '82. I don't think of that as "intervention", just normal cyclical loosening.

The first I recall was '87 crash. Fed cut rates by 5% and pumped in the liquidity.

Since then, the Fed and Gummint have come to understand that we can only maintain the appearance of doing well by running big budget deficits and creating "serial bubbles". And so, it seems we now have daily intervention.

ANDREW JACKSON WOULD HAVE NEVER TOLERATED THIS CRAP!

One of these days the house of cards will come down, and we'll have to alter the way we do business.

 

[paysense]

To answer your question - <b>YES</b>, the Fed fu&*ed with everything for more than a year - jerking reasonable short plays right out the water - time and again.

Finally we are now allowed to capitulate and put in a healthy bottom. But only after they allowed for banks to rob us of $Billions.

They are still losing more money than they made all these years and executives aren't caring about those that will follow.

But yeah - not the norm and costing the Bear to prolong and be costly. Next time around we may not be so "lucky" as to even have a financial system. . .if deep reforms are not made.

But their "think tanks" and a few million into pol pockets will allow for more grand schemes and the common people in their apathy will allow for it.

Sad, but true.



Pay$ense