Powell is scared!

“I'm not even a little bit happy” with Powell, the Fed Chairman. This is what President Trump said publically. Apparently Trump has increased his rhetorical criticism on Powell recently. By the way, no president is happy with any Fed Chair when they are increasing the rate, period! But Trump is the only one in the recent history who openly criticizes the Fed Chair. Then just the day after the criticism, Powell sent a very dovish signal to the market that the Fed will likely pause the rate hike soon as we are just below the "neutral rate" that is the target for the Fed. Temporally it seems quite clear that Powell was scared by Trump's escalating rhetoric attack. But the real reason I think is that Powell is scared of something else and he must to do something to calm the market. It is the bond market warning signal that really has scared Powell, not Trump! Let me explain.


I have talked about the coming bond crisis not long ago (see here). The biggest threat is the unavoidable junk bond fallout in the next few years. Of course, the crisis will not surface if the interest rate is kept low but it will quickly become more and more a serious problem due to its size and the number of companies involved. We are talking about a few trillions of dollars worth of junk bonds that are due in the next 3-5 years. When the interest rate goes up in a fast pace, the junk bond market feels the pressure and has negatively reacted not seen in the past few years. See below the junk bond chart for HYG. It has been basically walking on the sideways for the last two years in the tight range $85-90. Then it started to break down recently. Don't take it lightly, friends. Junk bonds are usually the leading indicator for the market and they are most vulnerable to the rate increase. Think about it. If trillions of dollar bonds suddenly cannot meet the legal requirement to pay the interest and go under belly, what kind of impact it will have for the economy? Powell knows very well the dire consequences and he has got the message from the warning. That's why he softened his tone to signal that the rate hike will not continue in a fast pace as previously expected and will likely pause for a while next year. The market was apparently happy with what he signaled with a big daily jump rarely seen in the past few weeks. I think the market has found a good footing with Fed's support and is ready for its next leg up that may last for months into 2019.


Of course, don't expect a straight line up but more volatility along the way. The most imminent significant headline risk is the Trump/Xi summit tomorrow.  The general expectation is very low and don't see a positive outcome to come out of the meeting. Somehow I'm more optimistic and think a better than expected outcome with a goodwill deal may very well materialize. Here is what I think what will happen between the two Presidents:




Trump: Hi, Lao Xi. Long time no see! How is thing going?
Xi: Cannot be worse, thanks to you, Lao Cuan! Why do you want to corner me without giving me any leeway with this stupid trade thing?
Trump: Come on buddy! You have all the power in your country that everyone has to follow your order. But for me? I have to fight for everything!! So you really should feel very good with that even though I do understand this trade stuff may have caused some frustration for you.
Xi: I tell you it is really face losing for me, guy!
Trump: OK. Since it is not a pleasant situation for both of us, why not we use this opportunity to work out something to please our people at home? After all, we are good friends, right?
Xi: Oh, yes! Let's do it tonight after the dinner!!

😏😇😎

Then we will likely see a pleasant surprise on Sunday that both US and China have agreed on a concrete framework to work out the differences on the trade issue. If this is indeed the case, look for another strong rally towards the 50 DMV which is little bit below 2800 at the moment for S&P. If the year end rally is indeed real, then we probably will a lot more than that in the final few weeks. One side note. I thought there would be some nervous selloff today in front of the upcoming uncertainty about the meeting outcome. So I took off quite a few nice gains from the positions I placed in the past two weeks or so to be ready for a negative shock. But the market is anything but predictable on its daily moves. I'm very impressed by the final hour strong up move today. I guess more people feel the same way as I have been now for a good outcome. But if not, then the market may likely tank severely as well. So in any way, I'm not regretted to take off some chips today! Purely from the risk benefit perspective, it is not a good idea to chase highs from here. Many people can get killed if not well prepared for the potential disappointment. I'm positive but not 100% assured.

What the sentiment is signaling to us?

A few days ago I posted my blog indicating the current sentiment was extremelylow in general per the CNNMoney sentiment index. There is another well followed sentiment index that is regularly published by The American Association of Individual Investors (AAII). It just posted its most recent reading: Bullish investors have declined to 25.3%. Bearish investors are above 47%, a ratio nearly 1:2 in favor of bearishness. This is among the worst we have seen for this year.  We got similar readings three times this year on April 12, June 28, and October 25. As we often say, history may not repeat itself but often rhymes. So it will be interesting to see how the market was doing before when there was extreme bearish sentiment. See the chart below where I marketed the four time points with such a low sentiment, including the current one. You don’t need to be a rocket scientist to see the consistent pattern how S&P was doing each time following the time when everyone was depressed, right? Yes, a sizable uptrend at least for a short term!

As I said, I have been expecting a year-end rally now. Although I don’t know how highs it can go, I feel more confident that a rally is coming pretty soon. Maybe at least towards it 50 DMA which near 2800ish as I’m writing? I know there is a lot of uncertainty making people really nervous, especially about the coming Trump/Xi meeting whether or not they could make at least a hand-shake verbal deal on Nov 30. Of course no one knows for sure but the TA is signaling that we are in the course of a rally in the weeks ahead. As always, TA may not always be right but I like what I’m seeing and would like to position myself for such a rally.  But just be cautious with an appropriate risk management in place and more importantly don’t overplay with leverage!

When it is difficult to be positive

First of all, HAPPY THANKSGIVING!
I posted last week’s blog to advise “It is time to be positive” when S&P was around 2730ish. I said I was expecting some strengthening of the market first before another deep dive to retest its Oct low around 2600ish. Well the Market God decided not to give me any face by slashing another 100 points from S&P immediately in the past few days. Then my friend sent me the sentiment barometer prepared by CNNMoney as below that indicates that the current market sentiment is extremely depressing probably the worst we haven’t seen in many years! On top of that, the famous Mad Money host, ex-billionaire hedge fund manager, Cramer, claimed that we should not expect any turnaround unless 10 issues are fixed. This is a pretty high threshold to overcome if this is indeed the case as I don’t see it can be materialized anytime soon, probably 6 months or longer! While Cramer’s Mad Money long term performance is really not great, much worse than the market per some specific study done on him (see here), his influence is still substantial on retail investors as he does have a fairly large number of followers. I think his quite pessimistic view on the market may have greatly dampened the sentiment of many investors who follow him.  Then an anecdote observation from a chat group I recently left that my friend told me that this chat group which used to have many active “guru talking” has been virtually “dead” recently. Very quiet for many days. Recently Tony Dwyer gave his thoughts on the market's recent behavior. He said we're in the "slop, pop, and drop" scenario. It starts with the market making an initial low. An oversold bounce follows this. It then culminates in a retest of the lows, which leaves investors feeling demoralized and unenthused. Putting all together, it is a downright depressing time and how can we be positive??

Well, over years, I have tried to learn to be contrary to the herd mentality. It is hard as it’s against the human nature to feel more comfortable with what most of others are doing but in investment it is often the right thing to do to go against the herd. So when it seems not a time to be positive at all, I do start to feel more positive for the months ahead. Of course, I’m not just armed by the contrary sentiment indicator. More importantly I see the strengthening of the technical signs that make me feel that we are very close to the end of this slow and water-torturing correction. Or let me put in this way: even if there is still downside from here, I think it ought to be very limited. Why so? Well, although S&P has not touched the exact Oct low around 2605, yesterday’s fast big downside move was quite close to that low actually. As I said before, TA is not a rocket science but more of an art. As such, we cannot go with the exact numbers without some flexibility. I feel this week’s move could be considered as mission is accomplished for S&P to retest its Oct low technically speaking. And on its daily chart, it has shown clear positive divergence for its momentum (MCAD) and relative strength (RSI). This is often an early indicator that the trend is close to changing and the daily chart tends to be good for the next few weeks at least. If this works out as I expect, then the weekly chart should also follow with positive trending, which will be good for months ahead. So here is what I’m doing and also advising my friends to consider: I actively start to accumulate positions for longer term, meaning for those well into 2019. Since there is no way to spot the exact bottom for anything except pure luck, my approach is to use TA as my guide to spot some support levels and then place a Good Till Cancel orders to let the market come to me instead of chasing it in this kind of super volatile and fast moving market. I have got quite a few filled this way. Then I’m also trying to nibble something for quick trades these days. I told my friend Monday’s morning that we probably would see weak start for this week but seasonally it could be a bullish week towards the end. So buying at weakness could be an idea. Well, the MG won’t make anyone easy as it has brought the market with a much larger downside than I had expected, causing a lot of fear and panic as far as I can see. But I stick to my gun and indeed got in some quick trades aiming for a quick closing by Friday or early next week. For example, yesterday’s severe selloff for Apple to me was quite overdone and I thought it could bounce back to fill its gap around $180-185 soon. That’s how I did for a call spread getting filled at the opening. Actually I could have closed it with about 50% gain within hours as Apple almost immediately started to move up initially during the day. But my greed came in as I was targeting for a 100% gain. Unfortunately the initial gain faded later of the day and I came back to where I started. But I’m still optimistic on this trade that I may get a double in just a few days, just as what I did a couple of weeks ago for Apple.

Just be aware, while my view on the longer term has become positive and bullish, it does not mean it will be a straight line up. The technical damage to almost all the stocks are quite severe, which requires some time to recover. So we are still going to see quite a lot of volatility and stocks will still struggle for a while to be fluctuating a lot especially during the initial phase of recovery. Don’t try to pick the exact bottom for anything as it is just impossible for anyone except pure luck. One better approach is to use the dollar averaging method to buy some initially and buy more at weakness. As long as you have a longer timeframe, I do believe now is a good time to be positive to get into the market again!           

It is time to be positive

I guess hardly anyone is positive at the moment regarding the stock market. Indeed we have just experienced the worst Oct not seen in years and the stock market is still very knee-jerking without being able to stand firmly for a few days. While I think the chance is high that S&P will re-challenge its 50 DMA in the days ahead, it is also a high likelihood that it will come back down hard to retest its recent lows around 2600. With this kind of highly volatile gyration happening now, how in the hell I could be feeling positive, you may ask! Well, there are two positives that I can offer you to think about. First, after the short term shakeup, ideally with another low retest, most of the folks who are still hanging there with a slight hope of immediately coming out of the woods will likely be killed by totally giving up and throwing in the towel, sort of speaking. This is the moment the real bottom is created and a new rally will start. I’m still expecting a sizable year end rally will come to the fruit after this unbearable water torture is completed. Maybe just a week or two to go through this! Then more importantly we are likely going into a very well established historical pattern for a strong stock market in 2019. This is not something coming from my dream. It is a pattern backed up by 70 years of data with a very consistent trend. Let’s called it the Presidential Cycle.    

Below is the data summarized by the folks at paststat.com, which shows the S&P 6 months performance from the end of September through the end of March, after each midterm election into the 3^rd year of the Presidential Cycle. Can you see anything jumping out? Pretty easy to understand, right?

Since 1950 and regardless which party held the President position, all the Presidential Cycles except one came out with a positive return for S&P. So the winning rate is astonishingly at 94%. While the results varied each cycle, the mean return was quite impressive at 15% over this 6 month period. The only negative return was almost nothing at less than 1%. Could this time be different? It is always possible but I really don’t think so. Actually I think the odds are very good for an even stronger return this time. As bad as it feels like at the moment for the stock market, it has actually created a lower base from which a stronger rebound is more likely, statistically speaking. Then the midterm election with a divided Congress is also something usually good for the market. As I said, the market likes gridlock as it has less chance for big surprises. Then comes with the final point I’m sure not many people will agree. I think we may be going to witness a last leg up for the 10 year bull run, or called Melt-Up phase which typically finishes a bull market by a violent up-run with a great deal of people chasing highs due to FOMO! It may sound ridiculous for the time being but I believe it quite convincingly that it may come in the next 1-2 years before an epic bear market starts! Of course you don’t need to believe me and just stay at the sidelines to watch. But I think you will eventually kick yourself by not participating in this last chance of a Melt-Up. 😵😵

At the mercy of Trump’s finger tips

I was actively travelling most of the last 2 weeks and couldn’t post anything last week. But it didn’t mean I was not watching the market. Certainly not as much as I would like but I did take a quick peek from time to time, which gave me enough food for some thoughts. As such, while I didn’t write anything for the blog, I did manage to send a few notes to my WeChat group with my thoughts on the market. Here are a few key points I made to my friends:

• As I said earlier about two weeks ago at the extreme pessimism (S&P touched 2605), I was expecting S&P a heck of rebound towards its 50 DMA around 2840ish at that time (see here). It did so by bouncing back to about 2825ish within a week or so after my writing. I advised my friends to sell at the strength and definitely not to chase highs. I personally closed a few double profits via SPY and AAPL etc.
• I have been expecting another Oct low testing (2600ish for S&P) following the rebound. That’s why I strongly urged my friends not to chase highs during the seemingly strong rebound. The question is whether the market would go straight down to retest the lows or would make another hoaxing rebound first to complete its unfinished work to bounce back to its 50 DMA before coming back hard again? The past few days were quite bloody for sure, which has made quite a pessimistic sentiment to the market and it seems very logic to think that the market would fall apart from here. With that in mind, I’m more leaning towards the latter scenario that the market may want to confuse everyone by mounting another rally first. Here is what I said last evening to my group: “As said before, I’m expecting a severe correction to test the Oct low around 2600 before mounting the final year end rally. The question is whether it will head straightly down or another attempt of rally? Given the pessimism we’re seeing now, my hunch is that it may rally first in the next few days before another final hard crash down to 2600. But if it breaks down through 2685 first, then it’s almost certain to directly retest the low immediately. So watch 2685 in the next few days to get a sense which way the MG is heading”.   Well it seems my hunch was totally wrong as S&P dropped immediately down to 2670 this morning but miraculously it fought back fiercely later in the day today by finishing with 1% higher from yesterday, closed at 2730. I cannot say I’m certainly right but I like my odds now with today’s bullish move.
• I also talked about oil, which has been a bloodshed lately for sure. But oil has done something very rarely. The severity of this continuous breakdown for 12 days has only been seen 3 times in the past 30 years. This kind of extreme pessimism is actually a good bullish sign. I bet there will be one heck of rebound coming very soon if not immediately for oil.
• Then I talked about the Chinese stock market as well, which has been one of the key concerns for the market that triggered the severe selloff since Oct. While it has been extremely painful for the Chinese market for the whole year and it seems there is no hope to see for the time being, I start to see some light at the end of the tunnel as a contrarian. The Chinese market is very much oversold by all means and its valuation is very attractive at this level compared to the US stocks. I still hold the opinion that a breakthrough in the trade talk will come sooner or later; maybe very soon actually. Here is what I said a few days ago,  “On the other hand, I think the Chinese market looks bullish to me. I think it may go up more than down from here around 2600 for the Shanghai index. If I’m right it may challenge 2700 soon and then 2800 thereafter. Again I could be wrong. Watch 2550 as the line in the sand. If it decisively breaks down through it, I’m definitely wrong and it will go down further. For now I’m more willing to bet for its upside”. In a way, I think the Chinese stocks are at the mercy of Trump’s finger tips as if he just tweets some positive progress regarding the behind the scene talks prior to his meeting with President Xi later this month, it may trigger a revenge rebound for the Chinese stocks, much more than the US stocks given how much oversold it has been. After all, when someone is pushed down into the water for so long without being able to breath, he will be fighting back forcefully if any relief is given. This is how I feel about the Chinese market at the moment and I can easily see a double or even triple within very short period of time if Trump’s fat fingers push a positive button in the next few weeks!

Finally, I haven’t talked to anyone yet but I’m betting for a severe correction for natural gas, which has been on fire in the past two weeks or so. While there is no question that natural gas demand will be higher for this earlier than usual start of the winter, the current moonshot is too fast too soon to me and I don’t think it is sustainable. I’m expecting a very harsh correction for natural gas in the weeks ahead.

My gut feeling

The OMG to the upside is still ongoing and more and more people are chasing highs now. While this round of bounce may likely have not yet run its course, I'm trimming down my short term long  positions with good profits that I got last Monday when the end of world type of OMG was trigged. I'm not bearish yet but I will be travelling most of the next two weeks and I don't want to see my profits evaporated when on the road. Better to be safe than sorry!👌


The biggest uncertainty is by all means the midterm election tomorrow. This could be equivalent to the 2016 election or the Brexit vote in terms of the market reactions. So expect some extreme volatility tomorrow and the days following. Of course, I don't have any crystal ball that I can tell you which way the market will go for the election result, but I do have a gut feeling that I can share with you. Just take my words with a grain of salt.


I think the market has set up and been expecting to see a split of the Congress with GOP controlling the Senate and DEM controlling the House. It seems all the polls have more or less suggest this is the most likely result. In general, the market hates uncertainty and loves certainty. This gridlock situation will create kind of certainty. You see, it will be certainly very challenging for Trump to push ahead any more initiatives as DEM will have more power to block him. They will likely even initiate the impeachment for Trump although it would certainly a vain hope for any chance of success. Actually I'll think the impeachment will help Trump for the 2020 election as more people will feel more disgusted for what DEM is trying to do politically. But this will be another interesting story for later. Having said that, I think the market reaction to this splitting result may be more negative than positive although it is largely expected already. What Trump is doing is certainly very positive to the economy as a whole and I think the market likes to see it continue. But I don't think it will be a huge run away for this scenario.


If the result comes out surprisingly for a total control by DEM for both Senate and House, then you really need to watch for the downside. The market will tank, probably more severely than for the Brexit reaction (6.5% plummet for S&P). I won't give it a high chance but we cannot totally discount it as well.


My gut feeling is actually other way around that GOP maintains control of both Senate and House, against virtually all the polls. We already got this kind surprise in 2016 that all the polls were wrong. I think we could see something similar this time again. If this indeed materializes, it will be a huge positive for the market and I think S&P can easily run up for another 100 points. This will line up nicely for my prediction that S&P could bounce back towards its 50 DMA around 2840 as I'm writing. This will cause a huge pain for those shorting the market and a final OMG running up may occur. That will be the time I will be taking off all my short term longs and shorting the market to expect its next leg down to retest it recent lows around 2600.


I don't think any midterm election has been so much impactful for the market in the past. Let's watch what will happen tomorrow night! I keep my fingers crossed for my gut feeling.   😂😤  

Oh My God

The past few days were probably “OMG” days, for both long and short sides! The market has been really brutal in Oct not seen for a couple of years, especially the last two weeks. We saw 9 days consecutive days of selling for S&P (from Oct 17 to Oct 29) with a climax to the downside to 2604, the low of the Jan crash. Sentiment-wise, I would even call Oct 29, 18 as a black Monday as it has really caused a lot of people just throwing in the towel and giving up. Here is what I said to a friend on Oct 29:  

Just look at the tone in WeChat, you know how depressing the sentiment is. It’s hugely bullish for me to be honest. Of course I cannot tell you the exact timing but it’s widely oversold. The coming rebound will be very violent and for sure will surprise all those talking down guys!  I’m adding more long positions today and will add more if it continues to decline. Great time to plan for long term expecting for a Melt-up next year. Tech and biotech are the best two deals now!

Well, I don’t think there are many people with this kind of mentality to feel good at lows and feel bad at highs. And the Market God has the habit to punish as many people as possible. So it is very likely a lot of people felt so scared on the Black Monday that they dumped everything as fast as they could. More so, many of them would be stunned by the OMG moment, feeling the end of the world was coming and they had to buy puts to protect or even foolishly short. So the Market God is punishing those first by mounting a violent oversold bounce! The past 3 days of  strong moonshot with 150 points up must have caused huge pain for those who shorted the market at lows. In return, another OMG moment is created, especially at opening of Friday when S&P shot up another 16 points. OMG, many must have screamed and thought they could have missed the boat for the bounce without rushing in to buy. Then MG decided to kill them as well swiftly by tanking S&P almost 50 points during the day. So folks, if you more or less have this kind of mood swing with the market, try to train yourself not to fall into this kind of trap.

So where the market is heading from here? At this moment, I’m more convinced that we have seen the real bottom of this correction around 2600. It is much more severe than I initially thought but that’s typical for MG to trick people. If I’m right and the market is indeed setting up for the year end rally, would it just go from here to shoot up straight line? Very unlikely. Instead, I think we may very likely follow the footprints of the Jan recovery, not necessarily in terms of the duration but more in terms of the steps. It basically involves 3 phases: hard selloff-strong initial bounce, followed by another selloff to retest lows, and then finally a more sustainable recovery. If this is indeed the way it will go, then we are just at the 2^nd phase now. The current bounce, even though felt like very strong, would likely stall at some point. The most likely stalling point is the 50 DMA around 2840, i.e. another 120ish points to go. At that point, another huge OMG moment will likely be created, hooking a lot of people into chasing highs due to FOMO (fear of missing out). Then the final strike hits again which, if severe enough, may even revisit the recent low around 2600. At that moment, we could see some real desperation and only then a real uptrend will be born from blood and ash! It could be a rather brutal process and no fun to go through if you are caught up in between. The best for most people engaged in short term trading is to sit tight without chasing highs or lows in the next few weeks. Of course, for long term investment and if you can handle the volatility, it is a great time to buy at dips these days with the understanding that you may not necessarily always be buying at the lows. A year from now though, you will be happy for those you buy now. Either trade or invest, be rational with a cool head!!

A promise is kept

You may call it a pure luck but to me it is a promise that was kept by TA (Technical Analysis).  As I said, I saw a stronger likelihood for Facebook (FB) to jump higher following the earnings report, although there was no guarantee as for any speculation. Well, FB didn’t disappoint me although it was a close call as it went through a roller-coasting reaction cycle, sharply gapping down immediately following the earnings report, bouncing back but nose-diving again, and finally coming back strongly the next trading day. After all, it was a disappointing earnings report with weaker revenue and user growth prospects with increasing expenses in the foreseeable future.   

Let me say a few words why TA, although no assurance, is a great tool for speculative trading. Here is the thing. Technical is a collective presentation of the crowd sentiment and behavior. As I said, it is often a leading indicator for the likely next steps of a stock. In this case for FB, the relentless harsh selloff in the past few weeks has put FB in an extremely pessimistic situation that has likely caused anyone who wanted to sell has already sold. In other words, the market has likely already discounted some very bad earnings news for FB. While the technical was sneaky enough to prevent us from knowing exactly what was the threshold to make bad news as good, I at least got a hint that the odds was in favor of a positive response. The positive post-earnings response has sent a very clear signal that FB’s worst day may have already passed. Its next major direction should be going up.

 

Then came with the market heavyweight, Apple. I guess it is easy to get a sense that my tone for Apple was more negative based on the TA. And I said if the selling is trigged, we can easily see a 20 points drop. Well the TA again has kept its promise by sending Apple down for 16 points following the earnings report. There is nothing wrong fundamentally for Apple but just the sentiment was too high for it that was not easy to be satisfied.

 

Following my post, I got an interesting comment: you have virtually said nothing, which I assume referred to my strong warning that I could be wrong. Here is how one may use TA for trading. Nothing in trading, regardless if based on TA or FA, can be 100% foolproof. It is always a speculation with risks. Having said that, TA can at least provide some probability for a trend. In these two examples, I personally have risked some money (in a ratio 1:2+ or risk 1$ for potential $2+ gain) to formulate a trade for FB as the odds for a positive reaction was much bigger than negative. For Apple, the odds was too close for me and I gave up without doing anything. This is how I will use TA for my trading.