A warning for Bears

End of Day Update:

The S&P500 finished Thursday mostly unchanged. Even though we find ourselves inside a holiday shortened week, volume picked up and has been above average the last three days, something that hasn’t happened in over a month.

Summer is winding down and big money managers are finally returning to work. For most of the summer we’ve been stuck in neutral because smaller traders don’t have the firepower to drive a sustainable move. nstead every directional move fizzled and reversed because big money wasn’t there to join the buying and selling. Now that they are finally back at work, we should finally see some life come back into this market.

The big question is if institutional managers will keep throwing money at these record highs, or if they will chicken out and start taking profits ahead of the widely forecast tumble.

As a contrarian I get suspicious every time I hear something from too many different sources. And this includes current predictions of doom and gloom. It’s been a really rough few months. Healthcare reform failed in a spectacular way. There’s been a revolving door at the Trump administration. Trump’s frequent criticisms of Republican leaders is not helping either. Then there is this North Korea thing that just won’t go away and keeps getting worse. And finally two hurricanes to cap it all off.

Any one of these items is more than enough to takedown a fragile market. Combined they are as formidable as a hurricane. Yet here we stand, less than 1% from all-time highs. Surely something isn’t right.

One of the most effective ways to study the market focusing on what it is NOT doing. What should the market be doing, but it isn’t? Given this flow of overwhelmingly bearish headlines, clearly this market should be in freefall. But it isn’t. What gives?

There is a lot of headline uncertainty surrounding this market, but it doesn’t care. The thing to remember about headlines is they get priced in over time. That’s because anyone who is afraid of those headlines sells to dip buyers who are not concerned. This turnover in ownership replaces weak with strong, creating a robust foundation.

For nearly a month this market has withstood one bearish headline after another. We slipped under the 50dma for a brief period. All of this selling cleared out most owners who could be convinced to sell. Now all that is left is people who don’t care about these headlines. No matter what people think “should” happen, when there is no one left to sell a headline, it stops mattering.

This is an important thing for bears and most especially shorts to understand. You have been given a golden gift in this relentless barrage of negative headlines. There has been more than enough to cripple a vulnerable market. But the thing to keep in mind is selloffs are breathtakingly quick. Sell first and ask questions later is the only way to survive a market crash. Yet here we stand nearly a month into this “selloff”. If we were going to crash, it would have happened by now. If this relentless barrage of headlines couldn’t scare owners into selling, I don’t know what it will take.

Anyone who is still short this market is probably only a little in the red. Rather than hope and pray for the selloff that isn’t happening, a smart trader admits defeat and takes his losses while they are small. This bearish trade has been given every opportunity to work, but this simply isn’t the right environment to be short. Be proactive and close a trade that isn’t working when the losses are small, rather than wait until the pain of losing money gets so strong it forces you out.

Keep doing what has been working and that is sticking with your favorite stocks and adding on weakness. Bears need to admit their short trade isn’t working while the losses are small because the biggest risk remains to the upside. If we were going to crash, it would have happened by now.

Jani

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