A 20% jump in 2019

It is the year end, the final day of 2018, a year with full of crazes in the market. The intensity and duration of the market volatility has not been seen since the last Great Recession a decade ago of 2008. It is the first time in the past 10 years that we have a seen the stock market for a loss (-6% for S&P). The market has touched the fur of the bear and it is still chased by the bear. Everywhere you see and listen to, it is pessimistic!  This past week, the percentage of bears among individual investors in the weekly AAII survey exceeded more than 50%, a record negative reading. It is coupled by the extreme negative mood as well reported for the newsletter writers per the prestige Hulbert Financial Digest. If you turn on your TV, all you are hearing is that the market is in deep trouble and there is no hope to see in the foreseeable future!   

But believe or not, this is kind of setup that historically almost always leads to a big jump in the next 12 months. And I’m willing to bet that we will probably see a 20% jump for S&P in 2019. With S&P closed around 2500 today, it means we may see 3000 in 2019. Call me crazy but I’m bullish for the new year as I have been talking about this for some time by now. Of course I’m not just blindly making a bullish prediction. Instead, I feel bullish with two major reasons that I think, while being viewed as very negative and the culprit for the market downtrend for now, could become a tailwind for the market in 2019.

• The famous US-China “trade war”. As I have said since the very beginning, I really don’t think we will see a full blown trade war between the two world powers and I think there is a high chance that we will see a good deal worked by the two sides soon. I’m not sure we will necessarily see it done by the current deadline of Mar 1 but even if not,  I think there will likely be some serious progression made to please Trump to extend the deadline. If that happens, watch the positive reaction from the market!
• Then the seemingly hawkish Powell for further rate hikes. But I think the FED may likely yield to the market pressure and may not raise rates at all in 2019. You see, the market has already given Fed “some color to see see” in the past couple of weeks. Believe or not, the Fed is very sensitive to the market. If the market becomes angry, the Fed will likely give in. This has been the case since the Greenspan time till now and I don’t think it will be anything different for Powell. He may talk hawkish to show his strength but in reality he may easily back down to clam down the market if needed. This is what the bond market is telling us right now and it is usually more accurate than what you will hear otherwise. Per the last week data, the Fed funds futures market is pricing in zero rate hikes for the next few years. Simply put, the market has told Powell plain and clear that “you dare not to raise rates further”! If that happens, watch again how the market will react. It will be a very strong propellant for market! The first Fed meeting is in January, followed by March, with the Fed funds market pricing in no rate hikes. I wouldn't be surprised to see a reversal in tone from the Fed during these meetings.

But let me be clear. This is my long term bullish call, nothing to do with near term volatility, which will still be very choppy with ups and downs in a wide range. Such kind of near term high volatility will actually be more of acting as a catalyst for both Trump and Powell to move in the direction as the market wants to see eventually.  So my high level theme for 2019 will be: high volatility for the first few weeks or months that may result in a retest of recent lows around low 2300, followed by strong bullish uptrend triggered by the US-China trade war resolution and clear signal for no rate hikes from the Fed.
STAY POSITIVE FOR 2019!!  👆👊👌

If you were dozing off for a week.......

Supposed you fell asleep for a week, or let's say a bit longer from the noon of the famous Wed (Dec 19) a week ago just prior to the last Fed rate announcement and suddenly woke up around 3 PM yesterday. What do you think you would feel about the market in the past 10 days? Absolutely nothing, you must claimed! Indeed, S&P was about 2530 prior to the Fed announcement and it was about 2520 around 3 pm yesterday. What all about the FUSS in the past week or so about the stock market, you must be wondering when you opening your dozing eyes and saw all the scary headlines like that:

Well, the market didn't do anything major if you just counted the two time points but in reality, it has gone through 3 major swings all breaking the historical records within the very short few days: On Monday, we suffered the worst Christmas Eve session ever. On Wednesday, we saw the largest single-day point gain in history. And then on Thursday, we had the largest intraday reversal in nearly a decade...  Honestly I was kind of speechless when seeing this kind of crazy gigantic gyrations never seen before. And all FA and TA are really looking stupid in trying to make sense what was happening during these days. But one thing I do know is that the world, which seemed to be ending, will never end as I was writing on Dec 24. Buying into this kind of horrific depression is never a fun and enjoyable but is often very profitable! As I put it: we may see a "rip your face off rally" that can often comes out of blue and we are seeing it now. But I'm pretty sure 99% or even more of people were running away not buying when the world is felt like falling apart. 


So now you have awaken up fresh and haven't felt anything ill and terrified and you are seeing the market is just trading around the level when you were dosing off. What would you do with all the cash you have now? While the market has indeed ripped everyone's face off by fighting back viciously in the past 2 trading days, we are in a tricky situation right now. On one hand, I'm convinced that we will still see some good days ahead with an ongoing uptrend for a few days at leas or even couple of weeks if lucky enough. I feel S&P 2600 is a very reasonable next target to reach or if the momentum is strong enough, we may even see 2700 soon! HOWEVER, and this is an important however, S&P has broken all the major and long term support lines in the past week or so and it has shifted its near term overall trend to the downside. Technically it has been damaged tremendously and it will require a lot of energy and more importantly time to recover. In other words, regardless how bullish it may look like at the moment and how high it may go in the next days or weeks, it may still be a "dead cat" bounce for the near term. We may still see a waterfall type of free fall at some point or Tsunami selloffs, especially when we start to see some overly bullish sentiment along with the up days. Right now I cannot tell you exactly when but I have no doubt that it will come pretty soon again. 


Don't get me wrong. I'm not in the camp of Bear Market at all, thinking we will see a full blown recession moving forward. A recession, which may be a prolonged one as I have said before, will come later but not so soon. I'm still very optimistic for the next year or two for the economy and the stock market overall. And I'm still looking for a "Melt Up" phase to come before we are finally hit by a true bear market with prolonged recession. This will be another topic for later. So how to manage the stock trading in such a super high volatile market? For the vast majority of investors, volatility is no fun and they are seeking stability and predictability. I certainly agree to try all your best to avoid risks in this high risk environment. Some people say cash is the king and you should go all cash now. It could be one easy risk free strategy but you may also miss some fantastic opportunity if the market is indeed entering into its final inning of the bull run. If I'm right, it could be very powerful with moonshot upside when it comes. Of course I cannot tell you exactly when this moment will come. It could be just a few weeks away or months away to start the journey. So we need to be a bit innovative with out of box thinking to find some way to invest while also with appropriate risk minimization strategy in place. I can offer you one way of doing so. What do you think if you can invest in S&P with knowing  that your downsize risk can be protected to a predefined level and in return you can enjoy a pretty good upside also to a predefined maximum? This to me sounds a very good deal for a vast majority of people who are so scared about the market at the moment. If you are one of them, then there is good news that you can easily do so via just one click of your mouse to let the strategy work for you without much risk involved. A brand new type of ETFs have recently been created which are truly very innovative in just doing that:

Innovator S&P 500 Defined Outcome ETFs – July Series:

• Innovator S&P 500 Buffer ETF (CBOE: BJUL): Designed to track the return of the S&P 500 (up to a predetermined Cap) while buffering investors against the first 9% of losses over the Outcome Period, before fees and expenses.
• Innovator S&P 500 Power Buffer ETF (CBOE: PJUL): Designed to track the return of the S&P 500 (up to a predetermined Cap) while buffering investors against the first 15% of losses over the Outcome Period, before fees and expenses.
• Innovator S&P 500 Ultra Buffer ETF (CBOE: UJUL): Designed to track the return of the S&P 500 (up to a predetermined Cap) while buffering investors against a decline of 30% of losses over the Outcome Period, from -5% to -35%, before fees and expenses. Investors are exposed to loss between 0% and 5% and over 35% over the Outcome Period, before fees and expenses.

These ETFs are designed to let you invest in the stock market without incurring too much risk for you as long as you also give up some profit potential. I think it is a very fair deal and a great strategy in the current crazy volatile market! On caution though. This is a very new type of ETFs created just in August this year. While till now it seems performing exactly as advertised, I cannot guarantee if they will meet up to their goal by performing exactly as it is supposed to be in the longer run. I'm just offering you an idea but you need to do your own research to decide if it is suitable for you. After all, your money, you call!! 

   
 

World will not end

It feels like the wheel is falling apart and the end of world is approaching. Given the uncertainty all around with no buying from big guys from the Street (most of them are already off for X'mas), the market can only sell. But don't be surprised for a "rip your face off" kind of rally in the final days of the year. There are two forces that can potentially trigger it. The market is so oversold right now, it may be just one headline away for a revenge rally.   There is also year-end rebalancing among pension funds, which should be in the billions of dollars. Any further selling to start the week could be buoyed with the anticipation of pension funds buying into year-end. Of course nothing is guaranteed as bears simply have the strongest hand at the moment. But one thing I'm pretty sure is that the world will not end!👼💃


One observation is that EWH (HK stocks) are continuously outperforming S&P each and everyday as I described in my last blog. Pretty amazing! Anyway, wish Santa Clause bringing good luck to all of us in the new year! For now, just forget about stocks and enjoy the holiday break, folks!!

Follow the trend

First of all, wish all the friends a very

 

🎈🎄Merry Christmas!🎆🎇

I will be brief but you may want to pay attention to this idea as it may allow you to make some money when the general market is keeping going down. Can you see the pattern below? I'm sure you can as it is clear there has been a divergence with one trending up and the other trending down since October. Can you guess which are the two here? I assume many of you can guess the trending down one (upper line) is S&P as it started to tumble exactly from Oct. So what is the other one (yellow line) which can beat the US market?



Quite amazing, isn't it but I'm sure rarely anyone could guess it right. It is HongKong stock market (EWH)! With the "trade war" (although I never believe it is a real one) actively ongoing between US and China, who would have thought about a strong uptrend emerging from the HK market which includes a significant portion of stocks from Mainland China. Seems against the logic but this is a true reality at the moment. When those doomsayers want to let you believe that there will be a disaster brewing in anything related to China due to the "trade war", the market is quietly signaling that there is no need to be worried too much about. If a trade deal is actually worked out in a few months time, which I believe is very likely, just watch how high EWH will go! If you are so panicky about the US stock market, then the HK stocks may be worth looking into!

I was thinking a Santa rally here since Oct but it didn't materialize. Maybe this can be a Christmas gift idea for you! 🎉🎃

What is working nowadays?

The market is in turmoil with increasing end of the world kind of feeling hitting everyone in the market. We are currently in a situation when emotion conquering logic, or an emotion-driven market. Forget about the two months relentless nonstop selloff. Just ask yourself if the fundamentals have suddenly dramatically changed overnight purely because Fed chair Powell didn't send a comforting message that Street wanted to hear? I bet no one would believe that logically. Nevertheless everyone still just wanted to sell amass in the last two days! Right now it is a rare time when there seems nothing is working if you are long anything.  
TA is useless at the moment as no logic one can follow anymore. Yesterday, put/call ratio reached 1.83, the highest reading since it was tracked back in 1995. Today's another hash selloff would likely push it even higher. So the pessimism has made an extreme history now in terms of this indicator. I'm pretty sure hardly anyone would consider buying right now. That's the time, as a contrarian, I'm actively buying for short term trading purposes with average down. Even though buying during panic is never a comfortable thing and actually more like "pinching your nose, closing your eyes and just buying it" kind of effort, I think this is the moment a small risk may be rewarded enormously with a snap back that may occur at any moment and if so, will be very violent and powerful. 

Of course, I don’t want to be surge-coating the terrible market reality at the moment.  

As of mid-October, in the S&P 500...

• 250 stocks were down 20% or more from their all-time closing highs (adjusted for splits and spinoffs).
• 162 were down at least 30% from their all-time highs.
• 113 were down at least 40% from their all-time highs.
• 69 were down at least 50% from their all-time highs.

You may hardly think there will be anything that can make money right now but believe or not, there is. Per some work I have seen from my sources, there is an elite group of stocks - each also a member of the S&P 500 - that is up more than 5% in 2018. I’m sure you want to know what stocks that are so strong to go up against the bearish overall market. It should not be a big surprise to you if you follow my blog closely. I’m talking about the so-called Dividend Aristocrats! These are the stocks that have really great fundamentals and have paid dividends nonstop for over 25 years or longer. These are the ones that will usually shine during bear markets and they can make you rich, really rich without much of your efforts! If you want to know why, it is worth rereading my blogs here and here.  

You may not believe but two years ago, Fidelity did a study and they found a theme. The people who didn’t touch their portfolios did the best; those with the owners who were either dead or unaware they had an account.  This is very similar to what a DRIP is supposed to do: you just buy those quality dividend stocks (better dividend growth stocks) and then forget about it. Of course I’m not really telling you to totally forget about your stocks as you still need to pay attention to see if there is a big change in the fundamentals of your companies. But generally speaking, if your long term dividend stocks have no problems in its fundamentals and are still churning out dividends year after year, then leaving your positions alone and buying more when they are down or simply via DRIP is the best way to accumulate wealth over time. Here are a few stocks worth considered although please don’t just take it as my recommendations. Do your homework and make up your own mind what to buy!

One of the best

The market is extremely volatile and confusing. That has helped to make a widespread depressing mood in the market. It is almost like following a clueless bear wandering into deep woods and then totally lost! But at least you may find me waiting for you in the woods and point a pathway out for you😅😅


So is there anything tradable in this toxic environment? Sure of course! Apple is the one, for which I have traded in and out several times already in the past few weeks with good profits. Closing down to $165 again Friday has made it another great opportunity for trading. Another one that has treated me extremely well over the past decade and never let me down is my beloved stock, Microsoft (MSFT)! For those who know me, MSFT is a quality dividend growth stock that I have highly recommended since its $30s. After having tripled over these years, it is not really cheap anymore these days. So I don't add new money into it for long term holding. But MSFT is still often a great stock for trading purpose. It is even more attractive these days when nearly everything is falling apart but MSFT is so resilient that it stands up firmly without faltering much. In the past two months when the current correction started, most of tech stocks have fallen over 20% or more deeply into the bear market territory. MSFT is one rare exception. Yes, it has also come down a bit initially but quickly it has started an upward trend supported by its momentum trend. Most importantly it has never violated its 200 DMA, suggesting its long term uptrend is still firmly intact. Right now, it is trading in a very clear range between $105-113ish. Friday's rough selloff has also knocked it down to its lower channel band. Will it bounce from this base? I bet it will and I put my money where my mouth is. Of course, trading will never have 100% certainty with assurance but I think the odds is high for MSFT to march upstairs from here! 

It's even worse

AAII latest sentiment survey result just came in: by Wed investors' sentiment is 48% bearish vs 21% bullish. Sounds familiar? Yes, I posted the result of the same survey a few weeks ago and recalled what was the result? 47% vs 25% (see here). So it is even worse than the last one. Actually it is not only the worst sentiment reading for the year, it is the worst in the past two years, I believe. No wonder we couldn't see any sustainable rally this week as each early morning highs were ended up with late day selloffs. Today. it reaches the climax by cutting 50 more points from S&P.  I'm pretty sure it is a sickening feeling for most people out there! But believe or not, technically it is a bullish move as the market is just cleaning the dead woods now and set up a clean launch board for a rally. You see for all the weeks, the market couldn't hold any gains but also didn't crash much, often just closed around where it was. With today's hard selloff, S&P daily chart has created a beautiful positive divergence, an important technical strength to support a more sustainable rally. Together with the extremely depressing sentiment with an extremely oversold condition by virtually all the indicators, this will be the perfect time to trade for long at least for the next two weeks or so. Maybe the market is just doing everything it can to mask its true intention but stealthily setting up for the year end rally.  


Last time after I posted the depressing sentiment result, S&P jumped 90 points almost immediately thereafter. Will the history repeat itself? I don't know but I bet it's intending to do so!


By the way, someone posted the following to vividly describe what people usually behavior when the market reaches the bottom:
 
《怎样识别股市底部特征》


股票群中：
特征一：群没人爱说话了。
特征二：说话的人言语中带有暴力倾向。比如我这种准绅士开始骂娘。
特征三：说话的人什么都谈，就是不谈股票。
特征四：没人看A股，都在看A片。
特征五：群主失踪。
如果出现上述3个以上的特征，可以大胆买进；如果以上5个特征同时出现，可以满仓操作。


Sounds joking but I think we start to see a lot similarity nowadays as far as I can see. I'm in many investment chat groups and indeed many groups are virtually dead as if no one is interested in talking about stocks anymore. This is a sharp difference from just a few months ago when people were very active in such groups about markets and stocks. Feels like we are indeed in a desperate depression state which is typically seen at the market bottom, not top.😀😀


 

My double down

Why Apple will continue to be sweet for long long time

As I have recently written, the sentiment for Apple cannot be worse at the moment. All the sudden it has fallen from the heaven to the hell, all within just a short few weeks! So much so that Apple lost 25% of its share prices from the recent peak and been well in the bear market territory. I really have to laugh how quickly people’s sentiment can change but I have seen too many times. I’m used to it for sure!

So what has made such a quick bearish turnaround for the Apple’s sentiment? The declining trend for iPhone sales, period! Indeed, thanks to the genius, Jobs’ revolutionary innovation to bring the birth to iPat and iPhone less than 10 years ago, the demands for iPhone and iPad have progressively increased since its birth and 80%+ revenue for Apple has been concentrated in the device sales. Naturally when the investors sense any slowdown of the device sales, panic will easily hit their heart. Understandably people will wonder how Apple can maintain their profitability moving forward if their bread and butt cannot sell well. I do share their concern. But apparently not many people understand that Apple has already made great efforts to shift its business model from device-centered towards services-oriented. Here is the fact: Apple made $18 billion in services revenue in 2014, which has already doubled to $37.19 billion this year. But the trend is not going to slow down. It is estimated that Apple's services revenue will more than double again by 2022 to $80.65 billion and will jump to $101 billion just one year later per Morgan Stanley analyst Katy Huberty forecast. More importantly, the fast increasing services revenue will also drives up its profit margin, estimated to be over 50% for its gross margins on Apple's services, compared with the current average margin around 40%. Below is the chart made by Morgan Stanley regarding the increasing contribution from the services to its earnings per share and accordingly declining importance from the device sales. In other words, moving forward, the device sales from iPhone/iPad or Mac won’t be so critical anymore for Apple’s profitability. This is critically important for Apple as services revenue is more predictable and reliable as users tend to come back again and again if they have already started to use the subscription-based services. This is the case not only for Apple but virtually for any companies for this matter. Do you know why Microsoft has revived so much in the past few years? Many major and critical transitions have contributed for sure but one very important factor is its transition from selling it products (like Office) as a one-time product to subscription-based annual usage fees. Its sales have increased several times since the transition! Apple is just doing that. If Apple can just maintain the current P/E around 18, the fast increases of the EPS by 2022 will easily make its share price double from the current depressing price.

By the way, I’m not trained in finance at all but I can easily understand how positively these changes can fundamentally make to Apple moving forward. But I’m indeed wondering how those so-called professional analysts who are supposed to know all these jargons better than me cannot seem to get the points easily. You may not believe but it is often the case that most analysts are also behaving as herd. You may notice that they often upgrade in cluster when everyone is upgrading a company and then downgrade when everyone is downgrading. Just a few weeks ago, you would see majority of them rating Apple as buy or strong buy when the sentiment for it was clearly too euphoric. Now all the sudden, you hardly see strong buy anymore and many have downgraded it in rush. This is the time you should consider to buy, not sell or run away.

I lately have traded Apple twice since it got crashed after the earnings, both of which made me some good quick money. Last week when Apple was above $180, I told my friend to watch for the $170 level as it is clearly a strong support level, although I cannot say it is necessarily its ultimate bottom for this correction. Emotion can make things a lot worse than expected. Where we got the low testing yesterday where I got in again for a short term trade, although I didn’t get the best prices. It went up immediately during the day and I thought it had successfully tested its low for this time. Well, apparently the market does not want to make anyone’s life easy and today Apple got sold off hard again and even went down below 170 a bit today. I really like its technical setup for the near term and I took the opportunity to double down. Will I be lucky again this time? Only time can tell but I’m confident it will be another winning trade as well!     

If I were a day trader

I would be a big pain for me today if I were a day trader!


The positive surprise from the Summit may likely push it further to the upside extreme. In this kind of extreme, it is always wise to be cautious for the near term upside limit. I'm certainly not changing my mind about the potential for a Melt Up to be seen in 2019, but I'm worried about the next week or so bullish behavior of the market and would question how far it can go without coming back first. If you follow me, DON'T CHASE HIGHS FROM HERE! 
This was what I said last Sunday and sure enough S&P mounted a free drop on Tue as soon as it touched 2800 briefly on Mon. Apparently it was not enough for the Market God to punish those who chased highs as it mounted another 70+ tank for S&P most of day yesterday. Then miracle happened as buyers came in to buy when S&P retested its Oct low around 2630 and by the end of the day, it almost recovered all its earlier loss. The market sentiment has quickly changed from extreme high on Monday to extremely low on Thu and I started to become more bullish when it tested its lows. So I went in to get long for SPY yesterday when it dropped like a stone and I was pretty happy as it almost immediately turned to green by closing. Too soon unfortunately! The initial good reaction to the job report this morning turned out to be a fake one as the market has quickly turned down and never looked back. By the end of the day, it lost all its recovery yesterday and retested the 2630 low again. I could be killed if I were just doing day trading today with yesterday's longs. Fortunately I was not.


While it feels quite bearish again with today's big selloff, I feel more bullish again short term. Although we are still facing a real possibility of the breach of the Oct low, which will then bring the 2600 support into play and then the 2580 as the next line, I think the risk to the upside is more likely. Holding off the 2630 support twice this week was a good sign by itself; more importantly the volatility index VIX is sending another buying signal. Today's hike of VIX has made it closed above its upper Bollinger Band. This has been a very reliable buy signal when it comes down within the bands. Not necessarily immediately but I think this will come soon likely next week. If so, don't be surprised to see another 100 points jump. Remember, in this high volatility market, the mood can shift between extremes just with a beat of heart!

One could be BOIL’ed to death

Natural gas has been in a bear market for a few years since 2015, during which it had never gone up beyond $4 and actually mostly below $3. It was the same for most of 2018 as gas prices sat in a narrow trading range significantly below the five-year average. However, in November prices suddenly surged as much as 41 percent, thanks to the frigid weather that stoked concerns about supply shortages ahead. See the one-year chart below about the natural gas prices.

Naturally traders got excited and as always a FOMO occurred by chasing it to the moon. When this kind of euphoria developed, I think many people will get killed if they are just blindly follow the crowd or herd! Personally I think we have likely seen the highs for gas and if anything, a trending down in the months ahead is more likely than going further up. Two main reasons:

For one, the dramatic surge of the gas prices in the past few weeks has likely priced in the worst scenario regarding the potential weather related supply shortage. Then if the weather is not so cold in the coming winter season, the hype for gas will quickly regress. And the froth will be squeezed out as fast as you can imagine.

More imminently per Bloomberg,  tomorrow (Dec 6)  the OPEC, the Economic Commission Board for the global oil cartel, “will meet in Vienna to decide whether to curb crude output to help raise oil prices that have fallen by more than 30 percent in the last two months. If the 15-nation group approves limits, it could give U.S. shale drillers added revenue to boost their output of both oil and the gas that’s pumped up alongside it. The more gas, the lower the price.” So what will happen if they don’t cut the oil output limit? Bloomberg again, “Conversely, if the Organization of the Petroleum Exporting Countries and its allies decide against limits, it may take the gas market six to 12 months to see a slowdown in the existing flow of gas. That’s because it takes time it takes time to eliminate working rigs and let oilfield services contracts expire.” In other words, the current supply already priced in will not be immediately impacted much if OPEC keeps the current output limits. But if the decision is to curb the output, then likely more companies from the US which are not bounded by the OPEC decision will try to boost more gas production to get more revenues and in turn will bring down the gas prices moving forward.

I think the risk to the downside for gas is significantly outweighed that to the upside and we may see an immediate market reaction as early as tomorrow! There is an ETF for the gas sector called “BOIL” (how  metaphorically it is!) Its price action in the past month was also parabolic in line with the gas prices. It has already been cooling down a bit but I think it will tank if what I outlined above materializes. That’s why anyone who was chasing BOIL to the moon will likely be boiled to death or at least badly burned in the near future, if not immediately! Hope you are not one of those!! Frankly, I’m holding a short position for gas via UNG and I’m confident it will be very profitable in the months ahead. 

  

Don't chase highs if we get highs......

As I said, I was more positive for something worked out from the highly watched Trump/Xi summit. We now know the outcome was nearly perfectly matching with what I have expected; "Somehow I'm more optimistic and think a better than expected outcome with a goodwill deal may very well materialize." "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. " Yes, we have got a very clear framework dictating  what to be further worked on with a specific timeline, 90 days. In return, US won't further raise the existing tariffs to 25% on the $200 billion goods imported from China and currently taxed with 10% tariff. China will immediately buy a lot of agricultural and energy-related products from US, which effectively will eliminate the tariffs they are imposing on the US-exported goods. But what is more important is the coming negotiation on trade issues, including technology transfer, intellectual property, non-tariff barriers, cyber theft, aiming for an agreement within the next 90  days. Don't take it lightly for this gesture from China as such issues have been considered no issues at all by the Chinese side since the very beginning and the Chinese side has refused to discuss them as pre-conditions. Now the tone has fundamentally changes. While it is too early to predict what can be done on these very thorny issues within 3 months, I have a very strong feeling that US will gain a lot from these areas given the overwhelming pressure currently on the China's side that is severely damaging their economy. The stake is very high if no progress is made in the next few months. Both sides understand very well. 


So how the market will react to the summit outcome? I think likely quite positive at least initially. The market futures are showing quite positive moves as of now. If such gains can hold till opening tomorrow, it will immediately challenge 2800, the target I have been looking for since a few weeks ago. The question is how far the market can go if indeed it is now shifting to a rally mood. Just a week ago, the mood was extremely depressing and it seemed an end of world was coming. But I advised to be more positive at that moment: "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. "  Well, just within a few days, the market mood has totally changed from very depressing to quite optimistic. S&P jumped about 130 points within a week with a 2 year best weekly gain of 4%. When the market is moving so fast up with a blink of eyes, it is always making me nervous to be on the positive side for the near term. At the moment, the sentiment is completely opposite to its week ago mood, too bullish for now. The positive surprise from the Summit may likely push it further to the upside extreme. In this kind of extreme, it is always wise to be cautious for the near term upside limit. I'm certainly not changing my mind about the potential for a Melt Up to be seen in 2019, but I'm worried about the next week or so bullish behavior of the market and would question how far it can go without coming back first. If you follow me,
DON'T CHASE HIGHS FROM HERE! 

It is always like that

Do you see any similarity among the following?


Target (see here in 2014)
Walmart (see here in 2015)
Boeing (see here in 2013)
Ulta Beauty (see here in Jan 2018)
Lowes (see here in May 2018)




For one, obviously all of them are gigantic companies with mature businesses. For the other (although not necessarily many know of) they are good quality dividend growers with a long track record. You have already noticed that I link each with my previous blog for them. Yes, that's the point I want to make today in addition to the above two: They have all tanked significantly at some point in the past few years and each time I was pounding the table to advise to buy, not to run! More importantly each time each of them came back strongly from the crash. Boeing was even more than double I believe at its highs. And then the best dividend stock at lest for me, Microsoft, which I was even more than pounding the table many times when it got killed. It has brought me several times more than the initial price I paid almost 10 years ago, without even counting the additional shares I have accumulated over years via DRIP. I have referred to this post many many times but still I think it is one of the best I have written outlining why dividend reinvestment is such a powerful strategy for wealth building.


So why I bring this up today? Well, we are seeing another example now a great company is getting hammered like it would be going out of business soon. Yes, I'm exaggerated a bit but the sentiment is extremely low for it at the moment, making you feel like there is no good tomorrow anymore for it! I'm talking about Apple, one of the best companies ever created in history!! I guess I don't need to tell you much about how great Apple's business is but if you do want to learn more, here is a good comprehensive summary:  "Apple Has the Best Business Model for Generating Cash". No question Apple is a cash cow gushing out tons of money day in day out. Here is the thing, regardless how great a company is, there are always up or down days. No such things as always great without any problems. No difference for Apple. But the market has never changed its style: it always lures people into one direction for as long as possible, making everyone thinking that that's the only direction it will go (either up or down). Then it suddenly changes its course with a mighty force, causing overreactions. The examples I have shared above are just like that. But for savvy investors with a cool head, this is often the great opportunity to buy for such great stocks. And for me, I'm especially interested in great dividend stocks for long term DRIP. Although Apple does not have a long term dividend track record, its underlying business model with a great free cash generation power makes me feel confident that it is also a great dividend stock. The 25% recent selloff has made it quite reasonably priced now, especially factored in its huge cash hoard. I'm pretty sure Apple will follow the same route as those listed above and come back strongly before long!


Just a quick word about my short-term anti-sentiment trades with Apple . I made a quick double a few weeks ago when Apple initially got haircut and then quickly bounced back. As I said when it was around $210, I expected it would get sold off again maybe towards $190. It did but even worse, straight down to below $180. That was the time I got interested again and I got in with a bullish call spread expiring in two weeks (today). I was a bit too early and Apple was almost like hopeless and continued to slide all the way down to  $170 (with intraday below $170 briefly). I thought my earlier calls would expire worthless but I became more interested in it and bought another set of call spreads with better prices. Well, the huge bounce off early this week saved me by pushing my both sets of call spreads into green, of course much greater gains from the later one. So I got great profits from both this week. The contrarian trade against the extreme sentiment has proven itself again it works!   

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!