Thursday, October 9, 2008

In a bear market, no one makes money?

I have always heard this expression. Bulls clearly lose in a bull market, but shouldn't bears make money as well. Yes and no. Shorting in bear market can be treacherous.

Why?

  • The biggest one-day rallies in history have come in the 1930s (Dow) and 2000s (Nasdaq). If you are short, you have to have a strong stomach. Recent example was the short squeeze manipulated by Paulson & Co on Sept 18 & 19 (1000 Dow points in about 8 hours of trading).
  • Vicious multi-month bear market rallies that can find 20% rallies in a few months (example Sept 2001-January 2002)
  • Now, a non-level playing field where you are basically betting against the government.
  • As such, you have to time things really well
As I originally wrote in August, the S&P was going to the upper 1000 range. Then last month, I suggested upper 900s. Very recently, I even suggested that a crash was possible.

Mistake #1 (20/20 hindsight): You would think then that I would be making a lot of money shorting? Nope. Due to the Sept 18/19 fiasco where I was very short, I got nervous and reduced those positions for modest gains (around 1200 S&P)

Mistake #2 (20/20 hindsight): The one position that I held until Monday (SKF Ultrashort Financials). I sold it for a modest gain as it is heavily weighted in the big banks which until recent days had held up well. I knew that they would fall eventually, but in suspecting a big rally day was coming, I booted them. Since Tuesday to today, SKF is now up 40% without me.

Mistake #3:I have been bearish on commodities. Am I making money on this? Barely, as I have covered my short positions way too quickly and I have gone very small on these positions.

Mistake #4: I hedged a gold mutual fund position with HGD. What happened? Everything was working perfectly until Wednesday, when HGD was down 35% and the underlying mutual fund was only up 6%. Imperfect hedging...

Mistake #5: Then I thought that after the worst start to any month EVER, that we were due for a big bounce before either going lower or testing the lows. I took a few small long positions (10% of the portfolio) and in most cases, I got stopped out for a loss. However, I made the mistake of hanging on too long to a long position that I put on yesterday at S&P 1020 (thinking that we were going off to the races; compounding that, there were delays by TD Waterhouse reporting the fill so I only realized that I got filled a few minutes before yesterday's horrible close). I got stopped out on 50% today but I am still stuck with a small losing position.

To be short throughout this, you are either an incredible trader/investor (almost all the ones that I know are in cash or looking for a snapper and getting stopped out) or disregarding all rules of managing risk. To be short here would normally be hazardous as you could have an up 1000 day any time now. We are at record oversold levels. Sentiment is as bearish as can be.

Morale of the story: I have been expecting 80% of all this and I am barely making money and in some cases, losing.

I am looking forward to less volatility as this is crazy!

4 comments:

jen said...

To be short here would normally be "hazardous as you could have an up 1000 day any time now."

What a prescient guy you are, Adil!

I'd imagine trying to position yourself in this market takes most of your time, but do you know if any Canadian housing indices are due to be released soon?

Anonymous said...

Short sellers are parasites. When they ran out of carcasses (Bear Sterns), they started to attack the living (GS, MS).

Bring back the up-tick rule.

The SEC is a great big joke, but the OSC are clueless children.

Adil Burney said...

Short sellers: I will not respond further to this ridiculous suggestion. Believe me, it is not short sellers who are driving the markets down. It is the complete and total absence of buyers and massive forced liquidation of retail, hedge funds and mostly institutions....

Jen: please see an extensive post on the recent CREA data.

thanks for the nice comments. the 1000 day was overdue as we fell thousands prior to that day...

Chris said...

Just a thought here: Perhaps a narrower focus on fewer trading vehicles would benefit you.

I am not currently a trader, but did try a couple years ago at swing trading while trying to maintain a day job during market hours. I found it impossible to do because I hyper analysed every facet of an index/etf etc. trying to maximize my profit while cutting risk. The point you make about imperfect hedging reminds me a lot about of techniques I tried.

Anyway, if I was going to take a stab at it again, which I hope to do some day, I would want to focus on three vehicles: outright index futures, sectoral ETF paired trades, and reasonably straight forward option spread strategies.

It just seemed to me from reading the post that you maybe were losing sight of the goal which is to make money, rather than be perfectly right on how things move.

I hope you interpret this more as empathising rather than criticizing. Thanks for the blog.

Chris
Vancouver

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