As I said, the market is at its bipolar state that can drive traders to alternate their sentiments between the two extreme ends frequently. We just saw extremely bearish mood a week ago and now extremely bullish expecting to see new highs soon. I don't buy it although I'm ready to be proven wrong. The hype we saw Friday seemed very strong but actually with low volumes, not a convincing move for new highs. Likely there were a lot of short squeezes to rush to cover with a sudden change of the market direction triggered by a positive job report. After all, the sentiment was too depressing and nervous just days ago that was often the time for a short term bottom. Only time can tell if this will be another fake breakout as we saw a short while ago. And it still has several important hurdles to overcome before challenging its recent highs. I maintain my view that we will likely see more gyrations of the market in a wide range of fluctuations for a few weeks, a kind of sideway movements for a while. Then when everyone gets used to the new norms and believe the correction is over, it will strike again to cause maximal pain before finally completing its bottoming process. People may say they will not be fooled again by the market and will keep a cool head from now on. Can you believe them? For thousands of years that has changed virtually everything in our life except one thing, the herd behavior. You can bet with 100% certainty that most of people will feel more comfortable to go with the majority of other people by chasing highs when everyone is buying and selling lows when everyone is selling. This will surely continue forever, believe me! Even for myself I must say it is not an easy thing to do being against the herd. I'm doing much better by not chasing highs but oftentimes I have to pinch my nose and close my eyes to buy when there is panic selloff ongoing. But virtually each time brings me great profit margins although I could be early from time to time.
For this time, I structure my trading in such a way that I'm playing with both sides taking advantage of the bipolar herd moves with a general target for a low testing in the weeks ahead. I call it Bipolar Trades! I have longer dated puts (e.g. April or May) in place for the short side moves. But as I have repeatedly said, nothing goes straight line either up or down. As such using the extreme depressing moment that often comes these days during the down drafting, I pair my puts with long side plays (often weekly put selling) and I take profits quickly when the sentiment is shifted to the bullish extreme expecting for the ensuing selloff. A few rounds of such alternation has allowed me to make much more money than the cost of my puts and therefore I'm sitting with a lot of puts without costing me anything now. If I'm right and the market crashes again, I can make good money from my puts. But even if I'm totally wrong, they are just my risk-free insurance and I can still make good money from my short-term long plays that are always protected now. Giving you a real example how I'm doing it with CSCO. This is a great tech dividend stock that I'm holding it for long term with dividend reinvestment, my second largest long-term holdings after MSFT. It is doing great after several years of holding and I certainly have no intention to sell it due to the market selloff. But the panic selling when S&P crashed down toward 2530 caused everything on sales. That was the week I said I was really busy selling puts for all these great stocks. CSCO was among them when it was sold to about $38ish from a recent high of $43ish. Amazingly I found that I could set up a trade that could make me immediately profitable and then allow me to repeatedly earn incomes from it. I bought CSCO April $38 puts and then sold CSCO weekly $40 puts, betting CSCO would recover to above 40 very quickly within the week after the panic faded. Indeed that was exactly what had happened and the market quickly recovered with bullish sentiment built up. The gain from the put selling with just a week time had already made me much more than the cost for the April puts for CSCO. So I'm holding CSCO April puts for free now with net gain already realized and then I repeatedly sell CSCO weekly puts in the following weeks whenever the market sentiment is in favor of a short term uptrend. Each put sell brings me more net gains while I still have the downside safely protected. Right now, CSCO is alternating between $42-45ish. Will it be sold hard again down to $38 or below in the weeks ahead? I think it is possible if the market indeed starts another panic selloff. If so, my Apr $38 puts could also be profitable. But I really don't need to rely on it anymore. Even if there is no low testing and the market is simply going sideway or up to new highs, I can still make good money from it several times before April expiration. I have similar trades for AAPL, FB, MSFT and even directly with SPY, all having made me net gains by now with risk free puts in place. I truly love the herd sentiment shifts so drastically and frequently, which has made my life a lot easier to look for the exact points to be long or short.
At the moment as I'm writing, the market is getting into the bullish extreme state and quite overbought with Friday's panic buying. I had closed most of my longs when S&P shot up towards its 50 DMA and was busy closing my remaining longs Friday with the last push up. And now I'm largely with net shorts. It is possible that Monday will start with another bullish gap high, which will drive the market into further extremely overbought status. If so I will likely add more shorts to bet for the upcoming selloff. I'm confident betting against the herd is a wise and profitable strategy with bipolar trades!
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