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September 17, 2017 | Why Bears Will Fair Poorly When the Bear Market Finally Hits

Rick Ackerman

Rick Ackerman is the editor of Rick’s Picks, an online service geared to traders of stocks, options, index futures and commodities. His detailed trading strategies have appeared since the early 1990s in Black Box Forecasts, a newsletter he founded that originally was geared to professional option traders. Barron’s once labeled him an “intrepid trader” in a headline that alluded to his key role in solving a notorious pill-tampering case. He received a $200,000 reward when a conviction resulted, and the story was retold on TV’s FBI: The Untold Story. His professional background includes 12 years as a market maker in the pits of the Pacific Coast Exchange, three as an investigator with renowned San Francisco private eye Hal Lipset, seven as a reporter and newspaper editor, three as a columnist for the Sunday San Francisco Examiner, and two decades as a contributor to publications ranging from Barron’s to The Antiquarian Bookman to Fleet Street Letter and Utne Reader.

I wrote here earlier that when the stock market finally tops, even those who saw it coming will not look like geniuses. Mr. Market always has a surprise up his sleeve, even for those with stellar track records calling lesser turns. For gurus, most vexatious of all has been predicting the dramatic and sustained upturn in volatility that presumably will accompany the onset of a bear market. Thus far, Mr. Market has made chimpanzees out of nearly all who would try to pick the day or even week of this event.  Since the bull market began in 2009, most of those betting on a surge in volatility have gotten crushed as VIX has fallen more or less relentlessly from a high of 90 to a record low in June of 8.84.  It is all but inevitable that one day an explosion in this index will wipe out the very substantial profits of those who have sold volatility the whole way down. What is underappreciated is that those who have taken the other side of the bet will be unable to recoup their losses when the explosion occurs. That’s because the volatility spike will be so fleeting that volatility bulls will have not  minutes, but just seconds, to take their profits.

The Permabear Dilemma

Permabears who have been buying puts for years will face a somewhat different experience, one that will deny them an opportunity to cash out of their bet at maximum value. They are going to mistake the first stage of the bear for the big one, exiting puts at $10 that will be on their way to $200. It’s not difficult to imagine how Mr. Market might put them in the proper frame of mind to do so. They are already halfway there, having been conditioned over the years to think that any dip in the broad averages will be brief, and that the subsequent recovery will be swift and punitive for bears who have stood their ground.  It is against just such a psychological backdrop that we must envision a bear market that will treat bears as viciously as bulls; for that is the way things will unfold when they finally do.

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September 17th, 2017

Posted In: Rick's Picks

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