If you hang around Wall Street long enough, eventually you’ll hear the phrase…
“I’m so bearish it hurts.”
Investors feel this when markets take an emotional turn to the upside and traders start building short positions.
Everything confirms their view… from data that contradicts a “dumb” narrative to observing the wild-eyed craze taking hold of the same folks you couldn’t force to buy a thing at the lows in June.
Conviction starts building up as data confirmation rises. And the feeling that they’re about to catch the market off guard begins to percolate…
Now, everything is lining up, except price.
So, it literally hurts – and I’m speaking from my own experience right now.
But I’ve learned to sidestep the pain by doing two things…
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I always remember the emotional nature of the stock market. It’s the direct cause of miscalculating downside bets. There’s always that little bit of extra time it needs before it let’s go, even when the writing is on the wall.
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I always force myself to buy at least something… I don’t “throw the baby out with the bathwater.”
For example, the problem of timing is best seen with the 2000 tech bubble…
When the Nasdaq started falling in March 2000, the first tranche of the collapse came quick (like it did this year).
Back then, it fell 36% from the highs and this year it fell 33% (similar price paths). Next, came the 70% retracement of the move back to the upside.
A Fibonacci retracement overlay works well for this type of analysis because it connects any two points viewed as relevant, typically a high point and a low point.
So here’s a chart of the Nasdaq 100 Index in 2000…
As you can see, it took a few months for the market to show its bluff hand at the poker table. And when it did, it dropped a tremendous 80%.
Now, we’re going through the same thing.
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On August 12, I wrote about the big mistake stock investors are making… which is operating on a narrative that the bond market is rendering obviously wrong.
As I’ve mentioned before, the same people that were bears at the lows or too scared to buy (when stocks were actually reasonably priced) are now all raging bulls – a sign of momentum-chasing and FOMO (fear of missing out).
But this doesn’t mean the Nasdaq will fall 80% from current levels like it did back then. That’s because big tech actually generates earnings these days as opposed to back in 2000.
But from a macro view, that’s irrelevant given that the Fed has only two choices: either crash the economy with higher-than-anticipated rates or let inflation spiral out of control.
In either situation, tech stocks will be forced to trade back to their long run average valuations… which means prices need to drop.
In other words, “heads you lose, or tails you lose even more.”
But as I mentioned before, recognizing a rally built on false premises doesn’t mean you should throw the baby out with the bathwater.
I always try to find something I believe in… something to buy supported by solid fundamentals and a big macro trend.
That’s why on July 22 I recommended investors go long on one of the fastest developing trends in the (now globalized) natural gas market by buying Cheniere Energy (LNG).
Since then, LNG is up 25% in less than a month.
When stocks detract from reality – as they do both to the upside like now, or to the downside when there’s max fear – it pays to force yourself to even out your convictions by finding something of value on the other side of the trade.
And LNG is in a sector that’ll continue to rise at an increasing rate, even in the face of a selloff in broader markets.
It’s a great hedge for when you’re so bearish… it hurts.
Regards,
Eric Shamilov
Analyst, Market Minute
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