Should we panic?

The new year start for the market is really brutal and in the first 5 trading days, it has shed more than 5% of its value. Certainly this kid of relentless plunging has made people quite depressed. More and more people, including the talking heads at CNBC are talking about a potential  larger crash from here. The market certainly looks bearish and from longer term perspective, I’m more confident to say it will continue to go down substantially from here. As I said before, I’m expecting SP to test 1800 some time this year. But in the very near term, I become increasing bullish actually. You see, when the herd becomes panicking and depressing, it is usually suggest a short-term bottom is in. Actually all the technical indicators have lined up for an extreme oversold condition including SP closed below its lower BB with VIX above its upper BB. The NYSE McClellan Oscillator and NAMO are above 60. Then I have also noticed an interesting divergence: while SP has been down relentlessly, the junk bonds are holding up surprisingly well. Junk bonds often lead to the stock market, suggesting a bouncing is quietly likely in the near future. I bet next week we will see a quite strong rebound for stocks with a good chance of going back above 2000 for SP, unless more black swans fly out again from China again this weekend. So how to play this short-term bounce? Well there are numerous ways, the easiest way is to simply buy SPY for SP or more aggressively SSO. One may also consider to short SDS. Since strengthening of stocks usually means lower volatility, you may also consider to short VXX or even UVXY for high risk takers. After all, when the rubber band is stretched too much, it will snap back strongly.

But keep in mind, there are going to be a lot of risks in this market and any rebound will be short-lived. If you want to buy stocks for long term, then only look for good quality stocks with good valuation and also with good dividends. As you know I like WMT, which has been extremely bullish in the past week, up 5% vs down 5% for SP. For those bought around $60 or lower, just keep it as I think WMT is a great value stock to own for long term. I personally have traded WMT with call options. As such I have closed my position with quite a nice short-term gain. I think WMT is a bit going up too fast lately and may come down a bit in the next few sessions. If so, I may re-enter the position again. Another good quality value stock is AT&T, a boring company paying a great dividend. Just check its price action in the past few days and you will see it holds up very well in this very volatile market. AT&T will likely be doing well into the future.