Baby Bear Market Operations underway

Chicken Little has commenced a modest bear market action, selling the Dow Jones Industrial Average short. The Dow is at 25,250 and the all-time high is 26,951.81. So the trade risks a loss of 7%. 

Baby Bear Market Operations have begun

Chicken Little continues to believe that we are approaching an historic change in financial markets. The core thesis is that the US has delayed the consequences of too much debt by lowering interest rates. Thus, Chicken Little looks for opportunities to take risks that are limited and consistent with view.

All-time high in the Dow was in October 2018

The all-time high in the Dow was in October of 2018. The baby bear operation is a small short position. Chicken Little will cover the short position if the Dow makes a new all time high.

Sometimes a cigar is a bear market

Why short stocks now instead of waiting until the bear market is obvious? There are two reasons, and both are psychological.

First, it is much easier to add to a winning position than to initiate a new position. Consider that Chicken Little bought bitcoin last month at $5,000/coin. Today, bitcoin is just over $11,000. Do you want to buy something today at $11,000 when you could have bought it a few weeks ago at $5,000?

Buying at $11,000 is very hard trade to make psychologically. "Rationally," all we should care about as investors is expected future returns. In reality, we feel stupid having not bought lower.

The Chicken Little strategy is to start a small position and increase that in size. In the case of bitcoin, Chicken Little bought at $5,000, $6,000, $7,000, $8,000 and $9,000. Each buy comes at a higher price. Rather than feel stupid for missing the opportunity, this process feels good.

Similarly, the idea with the baby bear position is to increase the position if the Dow drops below the late 2018 lows in the 21,000 range.

In crises, markets move very rapidly

Second, and relatedly, markets move very quickly in moments of crises. These moves can freeze an investor. For example, in the European bond crisis of 2009, Greek bonds traded with a yield slightly higher then German bonds for years. Then, in a matter of weeks, the Greek bond yields rose dramatically.

The European Bond Crisis was too fast for most investors

Holders of Greek bonds saw their investments crater in value in a matter of weeks. Many were frozen in their positions. Again, this is psychological, but psychology is central to investing. An investor who buys a Greek bond at $90 is often unwilling to sell at $70 a few weeks later, even if $50 is coming soon.

In summary, Chicken Little has a small short position in the Dow initiated at Dow 25,250. This position will disappear at roughly Dow 27,000 or it increase at Dow 21,000.