Will the Real Permabull Please Stand Up?

Well, after one year of sharing many behavioral, technical and market insights through social media, it finally happened.  I guess I knew this day would come, but it surprised me nonetheless.

That's right, someone labelled me a "permabull".

There are a number of things that are quite funny about this.  

You see, I've actually always leaned toward the bearish side.  I've often attributed this to the fact that I started in the financial industry in the year 2000.  So as I was learning about stocks and the markets, all the charts were going lower and lower.

A former colleague of mine started in the industry at the 1982 low.  Guess what?  He often leaned toward the bullish side!  If you think about when you first started analyzing the financial markets, I bet you'll find that your perspective is biased a bit toward that type of market.

My own bearish bias served me quite well in 2007-2008, when I saw the SPX return to its tech bubble highs and I expected a selloff.  Granted, I was very surprised we traded all the way down to SPX 666, but I was very unsurprised that we sold off once we reached the 2000 highs.

On the other hand, my bearish bias did not help me in 2010 or 2011, when I saw the SPX trade to lower lows.  I distinctly remember seeing a head-and-shoulders like pattern emerge in 2010, only to be negated when the index broke to new highs into year end.

 August 2010.  Obvious head and shoulders top.

August 2010.  Obvious head and shoulders top.

 February 2011.  Apparently that was not a head and shoulders top.  Wrong again!

February 2011.  Apparently that was not a head and shoulders top.  Wrong again!

I finally acknowledged the error of my ways in 2013, when I saw the SPX approach its 2000 and 2007 highs, and felt fairly confident that we would see another peak and another selloff.  I was actually lovingly referred to as "Dr. Doomsday" by some of my colleagues at the time.

As stocks continued to higher highs and my bearish thesis was increasingly incorrect, I made a renewed commitment to trust the trend.  I reviewed my entire analytical approach to ensure that I was starting with the facts, then building a mosaic with those facts as the foundation.

This "evidence-based" approach is hopefully evident in my recent writings.  Most things I write these days include phrases such as "the weight of the evidence" or "until we see a lower low, the trend is in place" or even "higher highs and higher lows means an uptrend."

I look at the charts first, then I draw a conclusion.  Otherwise, I'm leaving myself vulnerable to confirmation bias and data mining.  If my job is to understand the price, then the first thing I need to do is analyze the price itself.  Then I can review supporting evidence and develop a complete investment thesis.

Now to be clear, anyone that has been correctly bullish on the markets for the last seven years could be labeled a permabull.  Or just "correctly bullish".  Whatever the label, if it's based on the weight of the evidence, then I'll take it.

I was recently flipping through my weathered copy of Peter Brimelow's The Wall Street Gurus, which profiled a number of early technical analysts and letter writers.  When asked what it would take for him to turn bearish on the markets, technician and devoted trend-follower Dan Sullivan knowingly replied, "The market would have to go down."

Labelling people as permabull or permabear relates to our tendency as humans to use heuristics (mental shortcuts) to make sense of the world around us.  This is similar to the use of stereotypes to characterize someone (often incorrectly) by how they look or sound.  

Why do we use these heuristics?  Because they free up our minds to focus on other things.  By simplifying the world around us, we can use our brainpower where it's needed the most.  So by labelling someone a permabull, we immediately draw a number of conclusions about their process and their credibility.

All labels and heuristics aside, I see the SPX as range-bound between the 50- and 200-day moving averages.  Until we convincingly break above the 50-day or below the 200-day, I would say the trend is decidedly sideways!


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