Trading Psychology: Timing the Bounce

To time stock market bounces, it is important to understand investor psychology and the impact to supply and demand.

Terrible news freaks out the market and shakes out positions - ultimately dropping price.  No surprise.  Buying the resulting dip while ignoring the collective market's sentiment and fear can result in lower profits or worse.

Buying the dip not only requires the collective masses to have punted and sold, but also needs to be timed such that fear has exhausted and created a degree of familiarity.  Bear markets are different from Bull markets in this regard.  Humans are typically optimistic people, with periods of pessimism and negativity.  Some more than others, but as a society we hope for good things.  We don't like to be fearful and scared witless for a long duration, but our "fight or flight" mechanism kicks in and causes rapid response - in the case of the stock market that tells the brain to SELL NOW.  However, over time we become familiar with the situation and start to see through the fear and see  potential opportunity.

Horror movies, roller coasters or those sky drops rides are perfect examples of this behavior.  The initial sequences and perhaps the trepidation prior to the event itself creates much higher degree of anxiety and fear than even a few minutes post. In short order, the fear recedes and we begin to reasses our emotions.  

Applying this to the stock market requires a bit more thought.  Since we all don't watch the "movie" at same time our collective impact is distributed over time.  Plus what I see as horror may not yet cause you to blink.  Being able to identify the exhaustion and pacing is ideal for timing momentum breaks.  

I like to visualize the market as cohorts of traders.  Individually they don't move the indicies, but as collective cohorts, they have meaningful power.  Also, they each react to markets differently from a timing and loss aversion perspective.  

So where does this leave us?  Well, as of today (occurred yesterday actually, got around to writing blog today)  I think we have a solid basis for a bottom right now that could last for several weeks to several months or more.  There are green shoots of optimism with talk that the worst may be over. And where the cohorts have been working over past 7+ months to drop the market, will enter market in kind to bring positive momentum.  

Time will tell, but take a look at the indicies and see if you agree whether or not the market has been exhausted.  Certainly there are many more on the sidelines.  But has the is the buyer to seller ratio now skewed in its favor.  If so, those cohorts, segments, or whatever we call them are likely primed to re-enter.  The existing basket of "fear" has worn off.  And just as the cohorts exited, they will re-enter with institutions being first.  And while they may be quantatitively driven, they are acting out of same feer/greed cycle to maximize their portfolio's return.

Note:  Technically, the markets are in a bear flag, but the market optimism and resistance we are seeing has me leaning bullish.  Only positions I bought this week were GBTC and SOXL based on macro activity.