I find it interesting that most of the blogs that I visit were either short or neutral on the market before this big move higher.
When I look at 2009, there were really 3 big moves so far.
#1 – The first move was the big move down in February when SPX moved from 800 to 670.
#2 – The second move was off the lows at 670 up to 800. Some traders even pushed it up to 880.
#3 – Finally, the last move was from 880 to 970 (or higher).
I admit my poll is not scientific, but I can’t think of a single blogger that is writing about how they caught this big move up from 880 to 970 (myself included). Even worse, I suspect that many that made nice gains on moves #1 and/or #2 have lost it shorting move #3 (I am glad not to be in this group).
For me, I think I missed seeing this move as a possibility (especially the velocity of it) simply because of how much conviction I have in the longer term bearish thesis.
The issue is really mixing up timeframes. The tough part about trading with a bearish tilt is that shorts tend to arrive early.
But if I am trading my charts, then why did my bearish bias enter my trading?
The answer is that I chose to follow the shorter term head and shoulders pattern rather than the much larger and longer term inverse head and shoulders pattern. The longer term pattern should have taken precedent over the short term pattern but my bias caused me to pay more attention to the shorter term head and shoulders. As I mentioned previously, due to the lack of depth from peak to trough, the fakeout head and shoulders was really not a good trade from simply a basic risk/reward perspective.
So many smart people understand that the large national debt, the government taking over private industry, the change in accounting rules and the permanent reduction in the size of the credit market (amongst other reasons) are likely to put long term pressure on the stock market. But it is quite possible that the foolish policies of today may not impact the stock market for many months or even years.
Of course, the bearish thesis has to be measured against the bullish thesis. In the short term, it is common sense that all of this “stimulus” is likely to show some positive effects and temporarily juice the economy. It may not be sustainable, but the bears did not give enough weight to the possibility of a short term recovery (or at least the market anticipating a short term recovery) causing a short term pop.
Without realizing it, I think many smart traders have been suckered into (including me) applying a bearish long term bias over a short timeframe. Applying a strategy from a long term timeframe across a short term or intermediate term timeframe does not work.