It’s Hard To Be A Bear When Everyone Is Bullish. Part 8

sell high go short

Explanation: Being a bear while everyone else is bullish is one of the most challenging propositions in investing. For instance, ‘Short selling is an incredibly lonely proposition,’ billionaire hedge fund manager Bill Ackman says. Yet, it can pay off big time if you get your TIMING right. However, since most people, even professional investors are terrified of shorting, I will introduce a quick series about short selling, proper risk management when short selling and the best way to maximize returns. This was to be a part of my never finished book (no time to finish it)…….

Part 7

Rule #3: Cover Your Short Positions & Go Long When Technical and Timing Indicators Confirm (Trading)

The rules found here are the exact opposites of Rule #2.

Always be ready to cover your short positions and go long if technical indicators associated with the underlying securities suggest that stock prices are about to break out. No matter how bleak the underlying fundamentals are at the time.
Always be ready to cover your short positions and go long at bear market or correction bottoms. No matter what you believe will happen to the overall economy in the meantime.
Always be ready to cover your short positions and go long when the underlying stock prices have experienced massive drops and could now be considered oversold or selling well below their intrinsic value. This rule applies to all market conditions. Bull and bear.
Always keep detailed technical charts, long-term and short-term, for all of your stocks and the overall market. These charts will tell you when stock prices are about to break out.
Cover your short positions and go long as soon as daily, weekly or monthly trends change from bear to bull. Typically, the exact exit points will be based on your overall trading strategy and risk profile.
Go long at the same time and price.

As you can very well imagine the rules above will complete the transaction and bring us back a full circle. First, they will help us with identifying market or stock specific bottoms. Giving us the ability to come in and assume long positions at giveaway prices. Second, these same rules will help us find stocks that are about to surge much higher and in many cases at X multiple to the market. Giving us a fighting chance to walk away with massive gains. Finally, the rules above force us to change course at exactly the right price and time. Removing all of the emotional aspects associated with investing out of the picture.

Here is another way to look at proposed Rules #1-3. They create a full circle of sorts. A circle that allows you to take an initial position at or near the bottom and ride what should be a massive rally all the way up into its eventual overvaluation bubble. Only to exist and go short as the stock price begins to collapse. In other words, this setup allows you to profit on both sides of the move. All while maximizing returns and minimizing risk in the process. The best part is; your initial entry point on this cycle can be at any point. For as long as you understand exactly where on this proverbial circle you are coming in.

Rule #4: Know Exactly Where You Are At All Times.

By default, you should know exactly where you are at all times. Although that may not be as easy as you might imagine, particularly, if you are new to the whole process.

More or less, the composition of all stock moves can be divided into four distinct parts.

Bottom formation (accumulation or trauma).
Bull market.
Top formation (distribution or blow off).
Bear market.

Now, the composition above gets fairly complicated once we begin to add multiple time frames and structural patterns to the underlying moves.

For instance, the overall stock market might be in a 10 year bull market, yet it is about to suffer though a massive 50% correction. Or we might be in a 17 year secular bear market, yet the overall stock market might be ready to stage a massive multi-year rally. Just as it did from both 2002 and 2009 bottoms. Further complicating the matter are the different size cycles developing in the market at any one time. Ranging in duration from hourly to decade long. In fact, it is their eventual combination (long and short cycles) that causes the final stock market composite we see on a daily chart.

Is there a way to tell exactly where we are in the overall composition?

Yes, there is. Unfortunately, such a method cannot be described in any reasonable manner, let alone in this short book. It can only come through years of experience and a tremendous amount of work. Particularly, when the above analysis is applied to individual stocks. Not to tout my market timing service, but you might want to take a look at the subscriber section of my website if this type of an analysis is of interest to you.

For the purposes of this book, we can apply the following tools or shortcuts.

To be continued……