The Problem Bears Face Right Now

Ever come across this scenario?

You throw a party – back when we had parties – and later in the night, as things are winding down and people begin to leave, you notice one person who doesn’t realize it’s time to move on?

So you start sending signals.

First, you start by yawn saying, “Boy, I’m tired.”

Then you turn off the music and start cleaning up.

And finally, you change into your pajamas.

But the only response you get from the holdout is, “Hey, any more beer in the fridge?”

Sometimes people just don’t know when it’s time to leave the party. A lot of bears may find themselves in that position very soon.

Despite the fact that the market fell faster and farther than it ever has in the past – down 35% at its recent nadir – they still want more downside.

And they may get it yet.

The problem is, the bears don’t understand that this is not a single party, it is a series of parties that occur in all sorts of different time frames.

This past week, Ben Carlson wrote a piece entitled, “A Short History of Dead Cat Bounces,” which illustrates the problems bears who stick around too long face.

(Courtesy of Ben Carlson)

As the chart above clearly shows, bear market rallies are notorious for their face-ripping ferocity, making it hard to stay positioned short, and it only takes a quick rally or two to undo the profits that were made on the recent drop.

But the other risk factor that laggard bears have is their propensity to think everything should go to zero. That’s because it takes a certain mindset to be a bear, one that is never satisfied with enough bad news or wealth destruction.

And one that is loath to acknowledge when the worst has passed.

We saw this play out after the market bottomed in early 2009 as the bears who were still at the party – not satisfied with a 57% drop from all-time highs – stayed on the sidelines, or worse yet, kept trying to get short, as the market went on to post one of the greatest bull market runs in history.

It’s a tough racket being a bear, particularly in a stock market that for 100 years has had an upward bias, but now that the “easy” downside money has been made, it’s going to be much harder to be a profitable one going forward - even if we do go lower from here.

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