I am a Bear

I have been accused of being bearish. People have told me that I publish nothing but bad news and bearish outlooks. Some even berate me for being too bearish and scary.

But I am a Bear!

Its like accusing me of being male and publishing male-related things and being too manly.

Well that’s because I am a man!

Being a Bear is something I chose to be because it is my style of trading. That does not mean that I only trade downwards and can’t be bullish. I guess most people don’t understand the concept because most players in the local markets are Bulls. They’re Bulls because they have little idea or any concept of what being a Bear is about. Most local players are actually investors who only want the market to keep rising. The so-called traders here are actually investors who don’t know the difference and mostly maintain bullish mentalities. Some can’t even grasp the concept of Short Selling or Puts because it is such an alien or unnatural thing to do.

There is nothing wrong with being a Bull or having a confused bullish mentality. Just like there is nothing wrong with being a Bear with a multi-directional mentality in a multi-dimensional market that is too dynamic to be so bullishly biased. After all, when you look at the market since 1999, out of the 15 years, 70% of the time (over one-year periods) the market was sideways, volatile or bearish. So why would I want to have a bullish bias when the odds don’t favour the Bulls?

Dow Jone Industrial Average

Being a Bear not about being negative or pessimistic. Its not about being a doom and gloom soothsayer. I don’t live in a cave and my life is certainly not dark and foreboding.

Being a Bear in a market full of Bulls (with tons of bullish shit and bull-shit) keeps me defensive. Its a common-sense thing. If there are so many Bulls scrambling to make the same buck, doesn’t it make sense for me to be a Bear to make the Bulls’ monies when things go against them? With far fewer Bears, that same buck is multiplied when the many Bulls lose it. In other words, there more bucks to be made by the few Bears from the many Bulls than the many Bulls could possibly make from the few Bears.

And because the Bulls outnumber the Bears, it is only right and meet that I take on a defensive attitude. The other advantage of being a Bear in a Bull-ladened market is that when the many Bulls panic, it is the most beautiful thing for a Bear like me. I don’t need a Bear market for that – all it takes is a scare, a rumour, an irrational trigger and the market tanks like a brick in water. If you’ve never seen a herd of Bulls stampede, you won’t appreciate how beautifully scary it is.

It takes approximately four times longer for a Bull to make a buck than a Bear. This is because when the market tanks, it tanks much faster than it rallies. Thus the saying;

The Bull walks up the stairs while

the Bear jumps out the window

Take a look at a typical sell-off. In May 2012, the DOW erased four months of bullish profits in a single month! In Singapore that same year, the Bears wiped out five months of profits (January to May) in 12 trading sessions (2.5 weeks) the following June.

I don’t need to convince you to become a Bear so I will not preach about the advantages and wonderful things that Bears achieve in the market. At the same time, don’t hate me for being a Bear. Don’t berate me just because you prefer to be a Bull and only choose to see bullish shit and bull-shit.

At the recently concluded Financial Mastery Workshops in Singapore and Kuala Lumpur, I had a flood of queries about why I had such a bearish outlook for the rest of the year when the S&P500’s PE was deemed “affordable” and “fair-valued” by bankers and analysts. Thanks to a good friend whom I will only name as Rich-M, I am able to break it down into simple terms for you to understand …

Table A shows the PEs of an imaginary index of 5 stocks having an average PE of 26.6 (grossly over-valued) when it is obvious that only one of the five stocks (MSFT) is grossly over-valued. Its high value has raised the average PE of the whole index to make it look unattractive to buy. In truth, KO, PG and JNJ are still buyable at 14, 15 and 16 respectively.

Table B on the other hand shows that all the components are over-valued but the average on the index is lower than Table A, giving the impression that Table B is less risky to buy than Table A.

So how relevant is the index’s PE in relation to the broader market? Very often, market mavens will use such statistical manipulation to hype up the situation and ease the fear so that the market gets another leg up. If you have no idea what their game is, you will be in for a shocker. That’s when the Bulls always repeat the same rhetoric; “If I only knew …

Furthermore, when most of the broader market is correcting by 10% or more, how can anyone claim to be in a Bull Market? If you didn’t know, the S&P500 is NOT the market. In fact, it only represents the better 500 of the over-8,000 issues on the NYSE.

Click here to read: Nasdaq is Mired in a Bear Market

But having said that, there is a way to use the S&P500 to determine if the market is truly over-valued. Its a simple common-sense method that only requires a watch list of all 500 components.

Put up the watch list and list the companies by their PEs – highest at the top, lowest at the bottom. Then scroll down to the company with a PE closest to 15 and place it in the middle of the watch list.

S&P500 - PE 15

As you can see, The scroll bar is pretty low down on the list. As of yesterday’s close on Wednesday 17 September 2014, 403 of the 500 components on the S&P500 have PEs above 15 – that’s a staggering 80% of all the S&P500 companies!  A little more than 260 (more than half the S&P500) have PEs above 20 (below).

S&P500 - PE 20

So now, what do you think about the relevance of the index’s PE ratio?

That’s how a Bear thinks and works. Bulls only want to hear bullish stuff and will live in denial about the really bearish stuff. I love being a Bear. I never was that profitable as a Bull but when I became a Bear, my whole world changed and I have never looked back since. Give me a Bull Market anytime – its easy to make money in one. But I prefer a Bear Market anytime because I am always ready for the quick bucks!

One more thing … if you can bear with me for a bit more …

In real life, there are more bulls being killed everyday as cattle and such. Other bulls are put to work in farms and breeding stables. Others yet are bred for slaughter in the bull pens of South America and Spain.

There are far fewer bears in the world today and most are protected species. And best of all, most of the bears in the world roam free.

ROWR!

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