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You Can't Become Rich In Your Pocket Until You Become Rich In Your Mind | ||||
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But, in bear markets, a large portion of short interest is invested with the (down) trendTools that Change Shape in Bear Markets A cloudy day, or a little sunshine, have as great an influence on many constitutions as the most real blessings or misfortunes. Thomas Addison, 1712 Stock market tools dont act the same, necessarily, in good weather and bad, rather like your grandfathers bad back or trick wrist/knee. When its raining on Wall Street, some market indicators must be looked at differently. Your car acts differently in freezing weather and so do many indicators in bear markets. Most peoples actions are different in bright sunshine from their behavior in dreary, cold, overcast climes. Some market indicators are the same. Bull markets are akin to bright weather, when most wheels run without a hitch. OVERBOUGHT-OVERSOLD INDEX An example is the overbought-oversold index, which, in a bull market, reaches a certain level and says, Stop, now we turn about for awhile. In a bear market, the oversold end of the teeter-totter can go out into the wild blue yonder without meaning very much. Even so, it too has a vague limit, a measurable limit area. But, unless you are aware that the rules have changed in a bear market, youll think a turn is due too soon. If you study the past history of your pet indices in bear markets, youll see whether or not they perform a bit differently. CONFIDENCE INDEX Barrons Confidence Index is another example. It often performs very differently in bear markets than in bull; the time lag changes. VOLUME One also interprets volume differently in a bear market, which is probably the most important single measuring rod in the entire marketplace. (See Chapter 8 for more on volume in bear markets.) It is probably no understatement to say 98% of market investors have no concept of bear market volume patterns. They go on in blissful ignorance using bull market formulas for volume. MONTHLY SHORT INTEREST Another interesting example is the monthly short interest. Almost everyone sees this as a big support under the market. In bull markets, this is true. But, in bear markets, a large portion of short interest is invested with the (down) trend. Those who are short are in no hurry to cover. Some will remain short for years, if necessary, until they feel a new bull market is genuinely under way. Thus, an amateur can be misled into buying when short interest climbs to its first new high in a bear market. Its premature. You will learn much of the difference between the reactions of your favorite indicators in bull and bear markets by studying them in both bull and bear years. ODD-LOT SHORT SELLING Youll find that daily odd-lot short selling figures at say 400,000 are, in a bull year, regarded as extremely high, but in a bear year are regarded as relatively low. DAILY NEW HIGHS AND LOWS In bear markets, one watches the daily new highs and lows differently. If the highs can remain superior on a new down leg in a bear market, there is a chance you are seeing a reversal, from bear to bull. DJIA 200-DAY LINE The DJIA 200-day line is regarded quite differently in bear markets. Although the principles are the same, unless you are conscious of the new market atmosphere that prevails when you go from bull to bear, your interpretations can be quite wrong for some time. BETTER TO DO IT YOURSELF This is not a book on indicators alone, and I cannot spell out how every indicator works in every respect, let alone how each works in bull markets as distinct from bear. Furthermore, it is more beneficial to readers not to have things spelled out in detail, for then they tend to follow such outlines as though they were the law. Its better to think out the rationale of everything in the stock market yourself. Then, not only do you understand the market better and know the whys, but you also know its limitations, and your thinking process has been sharpened in the process. In closing this section, let me liken the sense of it to fashion. You will still be wearing clothes next year but the style will be different. Likewise, you will still be watching indicators in bear markets but the interpretation will be different. ROBERT RHEAS FORECASTS More light about identifying the end of bear markets can be brought to the fore by quoting Robert Rhea again. One month before the final bottom in 1938, he wrote: In the opinion of this writer we are emerging from the second phase and going into the third and final portion of the bear market. This may last for a week, a month, or many months. On what did he base this perfect forecast? Stocks at that time had lost major portions of their value, the DJIA had dropped, and, in March, the yield on the 30 Industrials was 7.3%. The time was ripe on the basis of fundamentals and values for the birth of a new bull market. In contrast to the 1938 situation, the bull market signal of 1930 was obviously suspect. Nevertheless, it caught Rhea and most other observers by surprise. It was not logical that a new bull market would begin 2 months after the 1929 peak. THE LENGTH OF BEAR MARKETS History shows that bear markets tend to last a third to half as long as their preceding bull market. Two months would seem to have been an impossibly short period for a full correction of the long bull market, even though the DJIA had suffered a 50% correction at that 1929 low. As was the first drop in 1987. The tip off in 1987 that the market was not readying for a further plunge was the dullness which followed, which I discussed in Chapter 6. But hindsight is easy. When we are living through an event, using tools to predict what will happen next is not so easy. All the market tools in the world will not enable you to precisely call every top and bottom. But they will help you be right far more often than you are wrong. MORE ON SHORT INTEREST Another word about short interest during bear markets. As we said earlier, the shorts are not to be looked at as a big support factor in bear times. Lets look at the short interest figures of the 1929-32 crash. The first short interest figure ever issued by the New York Stock Exchange was on May 25, 1931. It was 5.5 million shares. The Dow Jones stood at 130 then. By December, it fell to 73 (nearly 50%). The shorts had made a killing, and, by the end of the year, the short interest dropped to 2.8 million shares. A rally then carried through to March 1932. The short interest rose to 3.5 million in January 1932 and to 3.3 at the rally peak in March. Then, the market went into its worst percentage decline in history (March to July 1932). Again, the shorts were correct. It seems to me that, during a bear market (following a great and active bull market), we can expect to have a continuing large short interest. But this does not mean the shorts must lose money. During a bull market, nobody asks how all those buyers can be right! Yet, during a bear market, one constantly hears that all those shorts must be wrong. This strongly suggests the position of the short seller during an extended bear market is a vastly different thing from the position of the short seller during a primary bull market. |
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