The Bear Trap

It is now being almost confirmed that the current rally has not been lead by bulls, but actually by bears, trying to escape what seems to have been a very successful bear trap.

The reasons? Volumes on the markets have been very limited for several months now, but the current rally has been some sort of self-fulfilling prophecy: the higher the markets, the more the bears felt in the trap and lost faith, buying into this rally to cover their shorts, or worst, buying because they have been sucked into believing in the V-shaped recovery and this mass hysteria with the clueless media acting as cheerleader.

As Adam Hamilton said last week: Realize that always in the markets, price action drives newsflow. It’s not the other way around as most people assume. When prices are weak, we all have a natural selection bias to seek out bearish stories in an attempt to “justify” the decline. The financial media greatly amplifies this tendency

I have been discussing this on these threads from Sovereign Speculator:
But the most convincing piece of evidence is the one pointed out by Zero Hedge. It seems like most of the short positions have now been closed (click for bigger image):


Marcus Marcellus said...

I agree with the structural argument, but hey, it's been a GREAT rally since March 6-8, 2009. All rallies end, so the idea that this or that is a "bear rally" is irrelevant if one - and this is the key - knows when to Sell. It's all about knowing when to sell. But really, even basic stocks like Palm (162%), Apple (100%) or Citi (280%) have been easy picking. Fundamental valuations mean very little right now; the technicals were there by late Winter. What people call a bear market is a golden trader's market.

I agree with the critique of the Fed, the "stimulus" and money-printing on a macro level; but one can use that knowledge to profit in the short-term while opposing the policies in principle. Take the world as it is: we cannot change the central bankers.

Really enjoy your site.

Happy investor, Marcus

pej said...

Marcus, you are right indeed, this rally allowed me to rip some hefty profits and I was lucky enough to be buy just before the bottom and also just after.

I am also trying to inform less lucky investors and also prevent retail investors from getting sucked into this market.