By, Woody Dorsey (updated 2/9/15)
This is an essay that I wrote in January of 1987. It describes various ways in which Bears may approach “hunting” and, waiting to “short” the Market. It was written in relation to the Bond Market. Bonds had gone nowhere for 3 or 4 months before embarking on a monster move from 7.11% to 10.20% in 6 months. It was one of the greatest declines and one of the greatest rallies in History. I anticipated it and participated in it. The Dollar was also weak, even precipitously so, during that period. These developments set off the infamous 1987 Stock Market Crash. The current state of the Treasury market may be entering into a similar kind of Complacency Distribution phase. If so, that would likely be penultimate to a significant Equity Exodus. Thus there is more time for these developments to unfold. However, when time does become “up” Markets enter into what old timers referred to as the “Kill Zone.” This essay is about understanding the process of markets and having the patience to wait for the “Big Picture,” to clarify. Meanwhile, there are plenty of market opportunities if we keep an open mind and keep massaging our Market flexibility. This is what I wrote back in 1987.
TRADING TECHNIQUES – OR HOW TO BE A BEAR
“To follow a bear, or simply to follow its tracks, is to “Reeealy learn something”, as the Eskimos say, smiling. Not only about where a bear went, but how it dealt with what happened along the way. The wide walk of a fat bear in June, you would see, differs from the walk of a thin bear in October. Bear tracks would show a consistent avoidance of deep snow; in spring they would not cross melt pools, where needle ice can puncture a bear’s foot. On a sheet of thin ice so thin it would not support a human step, you would see traces where a bear had crossed with skating steps like a water strider, sprawled neatly on its chest.” (1.) All quotations are from “Arctic Dreams,” by Barry Lopez.
“Stalking the seal from the polar bear’s perspective, the seal is a swift, alert animal (not unlike the bond market) that can be taken advantage of only at that moment of vulnerability – when it breaks the surface of the water to draw breath.” (Like the final throes of a rally). “Probably no other predator employs as many hunting strategies with one animal as the polar bear does with the ringed seal. It may take a half an hour to patiently approach a seal resting on the edge of an ice floe, surfacing quietly to reconnoiter, then submerging again. A bear may drift, toward a seal like an innocuous piece of ice; when it reaches the floe edge it explodes from the water and smacks the seal dead all in one motion. When it stalks seals over the ice, it flattens itself on its forequarters and slides slowly along its chest and forelegs, taking advantage of every piece of cover. It will scrape away the sea ice at a breathing hole until there is just a thin layer left, and then cover the ice with its body to cut off sunlight, so it looks to the seal below as if the thick crust of ice and snow are still present.”
OLDER BEARS
“Older bears (like some partners we know) have exceptional patience. They will wait for three or four hours at an ice hole, lying downwind of the hole on their chests, out of the seal’s line of sight. Just before it surfaces, the seal exhales, (an exhaustion gap after a buying panic?) and the sight or sound of the bubbles alerts the bear. When it charges a basking seal (a complacent market which is rolling over is often an easy prey), the bear does not seem to run as much as pounce. A noted polar bear biologist gives this description; “Cats. They are like big cats.” Fast? “It is absolutely unbelievable how fast they are – oh, do they come fast.” (Professional traders tend to double up positions almost immediately if they get the edge.) Shrewd? “Yes, they are making judgments at every point about what to do. And they are patient.” “When a single bear finds a good hunting ground, ten or fifteen other bears are likely to show up at the same place within half a day or so. “They just get to a place where something is happening and they get there quickly.” (The smart money moves together and it moves fast.)
YOUNG BEARS
“Young bears apparently understand the basic skills of stalking and still-hunting, but require patience. Their initial attempts to catch seals are frantic and impatient. A young bear may give up its watch at an ice hole after only ten minutes (small speculators are easily shaken out). Or they may charge wildly across an ice floe and dive headfirst into the water. Bears seem occasionally to lose their temper when they are hunting. “I have seen a polar bear watch a seal for half a day,” wrote a traveler, and failing to catch it by any stratagem, “it roared hideously, tossing snow in the air, and trotted off.” Other observers have seen bears smash off projections or smack the water repeatedly in frustration after just missing a seal. Eskimos rarely lose their temper, and almost never when they are hunting. The usual response to failure in these circumstances is laughter.” (A sense of humor is an essential ingredient for successful trading.)
DEEP PATIENCE
“The arctic is characterized by long stillness broken by sudden movement. The silent arrival of caribou in an otherwise empty landscape. The long wait at a seal hole for prey to surface. The river you have been traveling over by dogsled every week for eight months, and have come to think of as a solid piece of the earth, you wake one day to find a heaving jumble of ice (not unlike a sudden change in perception at the end of a long price trend which precipitates a major reversal). The Eskimo have a word for this kind of long waiting, prepared for a sudden event; quinutuq: Deep patience.” This is the ultimate attribute of the seasoned speculator: Biding ones’ time, ever-alert, looking for a break that signifies the end of a major market movement. Buy the Bust. Sell the Boom. Bull Markets die Hard.
Woody Dorsey has been providing market timing information to some of the largest institutions in the world for over 35 years. He is considered by many traders to be one of the best market timers in the world and is the publisher of sentimenttiming.com