On Bulls, Bears, and Opportunistic Traders

I have been in several discussions that involved some pretty polarized views about what to expect in the equity markets.

On Bears: The bears position is generally anchored in their belief that we will continue to see a significant deterioration of the macro environment and economic conditions, combined with an extremely overheated technical picture. This is not an entirely new or novel position, so I am not going to list every point in detail. Most of these points are pretty valid and you can read about them on many blogs, community websites or in the mainstream media. The bears also seem to be convinced that bullishness is back in vogue and the masses are back calling for a new bull market.


I have no beef with it, other than the magnitude of the decline the bears expect.
Many are calling for new lows, which would imply a move back into mid 600's or lower on the SPX. I disagree. Below is a summary of my post on Marketguru, where this discussion took place.


I am not so sure, we will revisit the lows. Look, there is always a possibility, but I think that barring a major systemic shock, along the lines of a 'Black Swan', we are not likely to crash to new lows. Obviously, one can not predict 'black swan' event, by definition, but we can account for it with some sort of probabilistic outcome. Yes, the patient (our state of the economy) is still very sick and is in ICU, but off of life support. As far as Black Swan, it could be anything - economic, geopolitical, or some kind of pandemic type situation (a bit more severe than swine).

If you are not familiar with black swan, just fucking google it.

On sentiment: In the circles I run, there are plenty of bears. In the media - there are still plenty of negativity. Blogs - many are still going over the same points. So from a sentiment standpoint I think it may be more of a push.

On Bulls: The 'bullishness' I do come across generally expressed as a) equities may have put in a bottom in March and b) the signs of economic recovery may signal that the most severe economic contraction has already taken place. I have not heard too many declarations of a new bull market, or return to the glory days of early 2005-2007. There are still plenty of scared investors, sitting up to their ears in cash, and I am talking about professionals.

We can have a correction at any time, a 5-10%, perfectly plausible. It will likely get some frothy money out and help technicals get back to neutral, or maybe even dip into an oversold territory. I am not at all comfortable with what the second quarter earnings reports will bring. I think it will be a bit more challenging to deliver 'surprises' we saw in Q1. Lastly, seasonality, (sell in May adage) is another thing that will likely help provide some type of pause, but if we DO hold 800-825 on SPX, I think more money will be come back into the market.

I don't see 30-40% decline as likely, right now. We just don't have the same factors in the equation that caused a 50% plunge from 14,000. The near death of the US financial system, massive, massive hedge fund deleveraging, the collapse of Bear, Lehman, AIG, and disappearance of Merill, Wachovia, Wash Mutual, trillions of $ from buy and hold crowd trying to get out all at the same time as the HF were getting massive redemptions and margin calls.

How can you you trump this unless we get a 'black swan'?

Here is what I see: 5-10% correction, pause, and then we grind our way back into the 900-1100 range on the SPX, where we will likely mark some time until we get a definitive recovery. I don't really consider this to be an overly bullish scenario, but the one that I view as most likely.

For the record, I do not consider myself either a bear or a bull. I am an opportunistic trader, and I can generally make a case for many different outcomes. I then invest based on the the one I consider to be the most likely one.