Mike Zigmont Mike Zigmont, author of the Zigmont Report, is a partner at New York-based Harvest Volatility Management, a hedge fund with over $10B AUM, offering volatility management solutions to its investor base worldwide. Mike has been publishing his daily newsletter (Monday-Friday) privately for the firm’s investors and his personal contacts in the investment business

since 2008, sending it daily shortly after the market close.


The opinions expressed below are my own

Just like January. We’re up again and the S&P is now higher for the sixth consecutive session. News and data weren’t material today and it seems that the main reason for investors lifting offers is because they can buy the S&P at levels below two weeks ago.

I don’t know whether the market attempted to warn us about *

something

* in the first two weeks of February, but if it did, that warning has been ignored. I’m reminded of this. https://www.youtube.com/watch?v=TjLc4z7hQtw

But after re-watching it, I’m starting to wonder who the dip-buyer is and who the worrywart is.

I still think that dip-buying is a crowded trade and that the risk/reward of the longs up here is bad. It doesn’t matter until the longs run out of capital or willpower though. I think willpower is the actual constraint. I don’t believe the majority of the longs are so leveraged that they will get liquidated in a big selloff.

I think that a big selloff will rattle their confidence before they are actually incapable of buying equities.

I wonder what kind of selloff that would have to be? A single, fast, sharp one won’t do the trick. We are too conditioned by 1987 et al. There’s going to have to be something different… and in some respects, worse.

There has to be something akin to a value trap, but for the whole market. There’s going to have to be multiple drops. Each one drawing in the dip-buyers. The first few dips will draw in the reflexive actors. The next few will draw in the technicians. The next few will get the value-seekers. Once all those groups have pushed in and are significantly underwater, the crowded behavior be corrected.

At that point, we’ll get the washout bottom that everyone was hoping for… everyone will have been right but early… the most common and infuriating mistake on the Street.

I wouldn’t expect the recovery from there to be fast and wonderful either. Otherwise the whole thing just becomes yet another buy-the-dip lesson.

So what am I describing above? It’s a bear market in equities. A reasonably long period of downtrend with rallies that draw the hopefuls in. Usually these markets come because of a recession. There doesn’t appear to be one on the horizon though. That fact gives the present bulls a lot of courage and influence.

So we have two big picture questions to consider:

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