The dollar king is bouncing as expected

I have been talking down US$ since early last year and it has been almost a waterfall since then. After a year falling, the dollar king has lost all its attraction and the sentiment had become universally bearish by Jan this year. As you know, I don't like popularity and crowdedness for any trades. That's when I called for a bottom of the dollar king and suggested a turning point was coming (see here). That was indeed a spot on call. Since then, US$ has been bottoming for almost two months and then suddenly it started an explosive breakout in the past week. Does this mean US$ has reached its ultimate bottom and will start a new sustainable bull run? I'm not convinced. I still believe US$ is in a secular downtrend that will last for many years. The big picture is still quite bearish for US$. But as I have repeatedly said, no trend is a straight line regardless up or down. No difference for US$. I still believe this is just a dead cat bounce for US$ although at the current moment, it is quite bullish technically and this bounce may likely continue for a while. In the immediate term, it is very overbought and is due for a decline in the next few days. But the decline, if so, is likely short-lived and it should find its support around $90ish and then resume its next leg up. It is quite possible that it will shoot up towards the next major resistance around $94-95 before starting to fall again. Of course, we will know better when it gets there based on the herd sentiment whether the dead cat bounce has finally run its course. For now, staying long with US$ is the right course of action!

Record high with hidden pain

There is no doubt that Amazon is one of the few best growth stocks in the planet, period. Quarter after quarter, it has easily beaten earning expectations and seems it cannot never fail. Whenever Amazon touch something, the targeted business will suffer. So from the fundamental and business perspective, casting any doubt on Amazon is equal to suicide. But it does not mean  the Amazon stock prices can only go up. From time to time, it may go too much ahead of itself, which may cause it to at least pause but may also trigger some hard selloff before resuming its next leg up. I think the moment for a potential severe selloff may be just around the corner. Let me explain.




Last Thu Amazon issued another superb earning report. No doubt, traders got really excited and there was no lack of FOMO people who were afraid of being left out and couldn't help but chase it after hours. Amazon shot up by 160 points and touched $1638 at the peak. It must be a heart-broken experience for those high chasers as it gave back 2/3 of the overnight gain at closing on Friday. This price action was quite bearish by itself as there was no convincing buying momentum to support its immediate uptrend. But more troublesome problem for Amazon is really embedded in its technicals. As you can see below, while the share price is going up, its momentum indicator MACD is going down, a bearish negative divergence. This is even more prominent in its weekly chart, suggesting a relatively longer term bearish trend.

Another topping sign comes from its sharp distance from its 200 DMA. As a general rule, when a price is too much away from its moving average, it usually corrects to close the gap, so-called reversion to mean. When the gap is 15% or more, it is very significant and vulnerable to a correction. In the past 10 years, AMZN has experienced 3 such incidences (see the arrows) and each time, it corrected to return towards its 200 DMA in the following weeks. This time, the gap is a whooping 35%, a very drastic elevation from the moving average. While there is no guarantee a severe correction must occur as it can simply stay sideways and let the 200 DMA come up to close the gap, I do think a chance is high for AMZN to correct in the next few weeks. The bearish technical setup plus the historical trend supports the near term downward trend for AMAN. Be prepared for the pain if you are long AMZN. Don't chase it if you are thinking to do so, at least for now!   

When Pro’s are scared

Are you scared in the past two months due to the somewhat severe correction that has not happened in more than 2 years? I guess many of you are indeed based on some offline conversations I have had. How do you think about so-called Pro’s who are specialized in managing the customers’ money for investing and trading? Intuitively probably you would think they were less emotionally involved and less impacted by the ongoing correction. Wrong! Honestly those pros as a whole are not too much different from the herd as far as I know and they are often euphoric when the market is going up and depressed when the market is going down. Actually their sentiment, when going to extreme, can serve as a great contrarian indicator. BUT let me be very clear, I’m not saying all the pros are bad. Actually I know quite a few pros who are extremely smart and good in trading and investing. I’m here just talking about the general phenomenon when you put all the pros together as an average.

Have you heard NAAIM Exposure Index? Likely not.  NAAIM stems for National Association of Active Investment Managers. This is really a group of people that can be truly called professionals in investing and trading. The NAAIM Exposure Index is a weekly survey among the hedge fund and mutual fund managers to show how much their portfolios are exposed to stocks at the current time. Of course zero means they are not in stocks at all and the index can go above 100% actually if they are leveraged by borrowing money to invest. In other words, this is a great way to reflect what is the mood of the pros based on the current stock market status. I’m sure you can guess that the index should have stayed high during the past two years given the extremely low volatility and well maintained uptrend in the stock market. Yes, indeed, the index has been mostly well above 50 suggesting more bullish than bearish sentiment among the pros. Guess when their mood reached to the extreme at the high end? Yes, Dec last year when it touched 120, indicating an extremely euphoric mood among pros to not only have gone all in but with significant leverage. That’s the time one needs to be really cautious and worried about the downside. Sure enough, the stock market reached to its top in Jan and started to rollover to punish those who were chasing highs. You can guess, those pros have also been punished well enough. Same as a typical herd reaction, pros started to feel nervous and dumped stocks heavily in the past 2 months.  So much so that the index dropped below 50 in Mar, first time in two years. While it is not a perfect timing indicator, it is indeed a good sign that pros are very scared as well at the moment and as a contrarian investor, I start to be cautiously bullish as I have told you a couple of weeks ago. So don’t blindly trust pros for managing your money. While you may find some good pros, many are just average at most.  After all, they are not too much different from the herd investors typically chasing highs and selling lows. Don’t be too pessimistic for now, folks.  Go against the Pros when they are scared! Of course, I’m not talking about day to day extremely short term trends. Rather, in the next few months, it is a safe bet to go against the Pros’ pessimism!!

Long term interest has reached my target for this year

Well the market is still a bit impulsive with frequent knee-jerk reactions. As I said, I’m cautiously bullish but there is no surprise the volatility will stay high for quite some time. Once again, the market selling indicator did not disappoint me and has precisely timed the turning point that has triggered a continuous selloff for a week since my selling call last week. As I said, this rarely triggered bearish indicator with VIX closedbelow its BB lower band often lead to a 1-2% selloff at least. Well we have seen a decline more severe than that. Great past week for me when the market was sold hard!☺.  

One seemingly scary headwind for stocks is the fast appreciation of the long-term interest. As I said before I’m pretty sure the 10year Treasury will reach to the 3% point, a strong indication of increasing inflation that is very detrimental to the market. We are now seeing the 10 year yield topping above 3% this week that has put a great pressure on the market. I have said many times that we are entering a long lasting high interest/inflation era that will harm the stock market greatly in the future. That’s why I’m strongly holding the idea that we may see a severe bear market that may last for 10 years or even longer if the inflation cannot be controlled well moving forward. With so much phony money created out of the thin air by the Fed and all the governments around the world, it will be really naïve to believe that there will be no consequences for the economy and companies in the long run. Don’t want to scare you but there is a very real chance that we are heading into a debt crisis no one can imagine how severe it can be at the moment. It will make the 2008 financial crisis just like a baby walk when it happens. Many folks are very fast to come out saying what’s the big deal with the 3% 10 year interest as it is still historically low. Indeed I agree there should be no immediate devastating impact on the borrow costs with a 3% rate. But the market is a forward looking animal. It is not too worried about the material impact at the moment but rather it is very worried about the speed of the interest rate increase and the flattening yield curve between the long term vs short term rates. It is just sending a very dire signal for the long term prospects for the stock market.

Having said that, we are not there yet for a long lasting bear market and we may still see good stock days for some time along with the advancing economy that is slowly recovering. That’s why I’m cautiously bullish for the near future, namely in the next 6-12 months. Actually I’m seeing another contrarian indicator flashing now to support my intermediate term bullish outlook (see more details in my next blog). As I said, I was expecting just a few days of selloffs as a relief of the overbought condition instead of long lasting bear market at this point.  Yesterday's big last minute turnaround clearly suggested the week long selloff has come to the end at least for now. The revenging rebound today has pushed S&P to its next important resistance level, 2700. This is a clear downward trend line since Feb and S&P must first break out this resistance before changing the course for a more sustainable recovery. Given the good earnings from a slew of tech companies after hours today, there is a good chance that tomorrow we may see a breakout to trigger the next leg up for S&P. Just be aware though, there are still many critical resistances for S&P to overcome before challenging its all time high and it will definitely not be a straight line up on its recovery course. High volatility will still be the rule and hard selloffs will still come from time to time. I hope I can continue to spot and trade with those short term turning points to juice up my long term positions.     

Another tragedy, another reminder

It is a sad weekend and again we are saddened by the news that our long time good friend, Jenny (a pathologist), passed away after 4 years of fighting with cancer. We went to attend her funeral yesterday to pay our final respect to her. This reminds me again how important to be prepared in case such a tragedy  hits us. A well structured life insurance is definitely an important one as part of our protection that I think everyone should seriously consider. Unfortunately its importance is often showing up when a tragedy attacks but it is often too late if nothing was done in advance. In the past 20 years, I personally have witnessed 5 deaths involving someone I knew well: 3 college classmates (including one died of heart attack when in 30s) and 2 good friends, all with premature deaths. I talked about one, Lao Pan, just half a year ago (you can see here) and now Jenny. Too sad as none of them had got good life insurance set up that could have helped them a lot during the last part of their life and their loved ones after their death. Well, I don't want to sound like I'm an agent aiming to sell you life insurance. No, I'm not but I just sincerely think how important it is and wish all my friends can be protected appropriately when they need it. This is especially true when a good well structured life insurance can also become part of wealth building strategy that can greatly support your retirement life even no tragedy ever hits, a one stone for two birds strategy!


Just a few quick words about the timing for a life insurance as it happened that I got this question from a few friends lately. They are questioning if it is too late to consider a life insurance when they are already at 50s. My simple answer is absolutely not. Of course if you are only thinking about a term life, then it is way too late at 50s. But for the Whole Life I'm interested in, age is not a direct factor to determine your premium rate as far as I know. It is the health status that plays a critical role. I know friends at 50s or even 60s getting preferred rate (the best rating) but at 40s getting not so good rating due to poor health. So it is not too late at all at 50s or 60s to consider it. As long as your health status is relatively good, this special WL strategy can be a great wealth building strategy that can grow your wealth in high yields guaranteed, tax-free, legally protected and can be used for long term care or life threatening diseases and of course can be passed onto the loved ones after life. To me, it is just like a high yielding saving account with all the above benefits built in. It can really bring us a great deal of peace of mind during our life with all kinds of unexpected risks that may hit us without prior warning. Each tragedy I witnessed has just increased my belief in this, hence this blog to share my thoughts!

I’m under the water but I’m doubling down

One bad news after another and people seem to just give up and throw in the towel now. I get it and it is indeed very depressing if anyone including myself have money in it. I’m talking about Bristol Myers Squibb (BMY), a great pharmaceutical company which is under enormous pressure lately. BMY had been in a bright spot for a few years since it successfully developed and commercialized the worldwide first ever immune oncology drug, ipiliumab or Yervoy and then anti-PD1 or Opdivo. But since then, BMY has been struggling with some missteps in the development strategies, too aggressive and ambitious apparently but has fallen short of extremely elevated expectations. But BMY is not a drug company based only on a few drugs. It is still a very prestigious company with a strong pipeline focusing on 4 major disease areas: Oncology, Immunoscience, Cardiovascular and Fibrotic Diseases. It is also a great dividend stock for long term. One thing I’m particular interested in is the potential for BMY to be a M&A target. I was thinking Pfizer could be the one to buy BMY in the near future. Given my long term love of the company with the M&A potential in the foreseeable future, I got some trading positions with BMY when it was around $65. I was totally wrong at least for now. Since I got in, BMY has been trending down to below $60 and then a bomb exploded after it reported good but disappointed survival results from its Phase 3 combo study called CheckMate-227 on Monday. Actually the treatment with the combination of Opdivo (nivolumab) and Yervoy (ipilimumab) in first-line advanced non-small cell lung cancer (NSCLC) significantly increased the progression-free survival rate compared to chemo (43% vs. 13%) in patients with high tumor mutational burden (TMB). Unfortunately the BMY study only included the TMB patients but its critical competitor Merck's data showed a similar survival advantage of KEYTRUDA + chemo regardless of PD-1 status TMB burden. Commercially obviously BMY will be challenging in competing with Merck, hence an 10% haircut in its share price.

That’s the trading risk we all have to deal with as no one can be 100% sure about the future. That’s why I usually only use hedged strategy or predefined risk strategy for any trading. Options are a fantastic tool to effectively mitigate risk with bigger return potentials. So for my BMY position, regardless how much it drops, my total potential loss is capped at certain point that I can live with. So far it is still a paper loss for me as I still have a few months time within which BMY may recover that can either substantially reduce my loss or even still make me money eventually. In my investment life, I have seen numerous incidences of this kind volatility including BMY that have eventually turned around to surprise those too bearish on them. Although I cannot be sure about BMY for the time period I have, I’m still hopeful. More importantly, I think BMY becomes even more attractive after this haircut. Although Pfizer CEO recently said they are not interested to buy BMY at the moment, the sudden market cap reduction of BMY may make it more attractive for the potential buyers. After all BMY still holds great assets with a promising pipeline. I think this panic selling is quite overdone and the MA potential is increasing now. I like the BMY depressing price at low $50s much more and I’m doubling down for it. I think it is no brainer for me to buy BMY at this level which can easily make up any loss, if any, from my earlier positions. That’s another way I’m mitigating my trading risks. Be clear, nothing is guaranteed but I’m confident with my doubling down! You may ask why I'm so confident? Well because I'm usually thriving on panic selling and I have gone through too many such times. Remember ULTA that was sold off to below $200 and now $235? How about COST that was sold to $150 and now is around $190 or TGT that was sold to $50 and now is $70? Not enough? OK, let's see one more for WMT: sold to $50s a couple of years ago and now is around $90 after topping above $100. My point is, as long as the company is a great business with good earning power, there is really no need to be panic even if the immediate trend is against you. You can always take others’ panic for your benefit to make more money!

I'm bullish but I'm selling

As I said, I'm cautiously bullish and expecting a breakout of S&P through its 50 DMA to the upside, for which I was calling it a love kiss. It indeed did so yesterday just with one attempt, a rather impressive accomplishment. I expect this upward moment will continue in the weeks ahead as a major trend but it does not mean it is a straight line up. Actually I think the market is a bit moving up too fast too soon, a stretch too far out for now. In other words, short term, the market is quite overbought and due for a pullback. You may notice this general up movement is not joined by the Financial sector, which brings up the question if the market can keep its momentum without the participation of the financial sector. In general, it's important to see the financial sector as a tailwind to support a sustainable uptrend. We also see a weakness of the junk bonds today, which often leads the market in its next direction. More importantly I noticed something pretty amazing and negative that has not occurred in the entire past 12 months. I'm talking about the breakout to the downside through the lower BB band of the volatility index, VIX. In other words, this is quite an extreme move for VIX to the downside, which is an important contrarian indicator for the stocks. It is very likely the next major move for VIX will be to its upside, which usually means a weakness of the stock market. Historically such a setup could lead to a 1-2% of decline of the market. That's why I'm shorting the stock market as of now for the next few days. But this will be a short term trade and I don't expect a long lasting market decline but just a relief of the overbought condition.


This is still a very volatile and fluid market that can shock you suddenly if you are too much chasing either direction. Be cautious, folks!

S&P may be on its way for a love kiss

I talked about the suicidal kiss for S&P a few weeks ago and predicted S&P would have huge challenges to overcome its 50 DMA without retesting its Feb low first. S&P indeed followed my scripts twice (see here and here) although it almost tricked me with two times of fake breakouts. Eventually it seems the market god just wanted to prove I was right☺☺ by completing the suicides. We are now seeing the 3^rd time in a roll that S&P is going to challenge its 50 DMA (around 2687ish and moving) very soon if not tomorrow. We are talking about just a few points away at today’s closing. The million dollar question is whether S&P is again making another suicide kiss? I think this time, it is probably making a love kiss and move on!

If you have read my blogs for the past two weeks, you should have already known why I’m thinking so. Against the herd common opinions which were overwhelmingly bearish two weeks ago, I was probably one of very few to call the potential completion of this round of correction since early Feb. As I said, I’m cautiously bullish now, expecting the overall trend of the market being upwards. Of course, let me be very clear that the 50 DMA is a very significant resistance to overcome for the market. I cannot say for sure that it will simply break it out to the upside with just one attempt. It may very well just pause or even drop a bit to satisfy those nervous herds betting for more downside for the market. But I think it won’t test the Feb low unless something drastically negative happen. Technically it can even drop towards 2600 but hold up above that level to be still in a positive uptrend. I think it may not go that far down if it backs off from its 50 DMA this time. To be more assured that the market has done the correction and on its way to fully recover, we need to see S&P not only successfully break out from the 50 DMA and importantly it can also hold well above this level for at least a few days supported by the bullish technical patterns. While I could be wrong and too early, I do see more bullish signs now than bearish ones!

Will you be naked?

I love and admire Buffett! He is not only the smartest man in investing but also a very humorous one with a lot of wisdoms. Here is one that I like very much: “Only when the tide goes out do you discover who’s being swimming naked”. What a great humor to educate us how to differentiate good stocks from bad!

We have enjoyed a decade long bull market with very little and infrequent corrections all along. For those who have only started investing since 10 years ago, they probably won’t have any idea about what a bear market will look like and how stocks will perform during bad days. From time to time I have seen people bragging how great they are doing and how they can always make money in the stock market. Indeed, this is the10 years of time when most people in the market can brag with confidence. But our life will be much longer than 10 years and any bull market will come to its end at some point. If you only believe and enjoy good days with stocks, then you may suffer terribly during bad days. While I’m not saying it is imminent that we are going to a bear market, I think we are close enough to be prepared for it. And I even think the next bear market, which may be 1-2 years from now, will be a long lasting one in a scale most of people cannot even imagine now! If you think the last 2 months are painful enough for you, then you are definitely not yet well prepared for a truly bear market. What we just experienced was really nothing and just a kindergarten play compared to what will be coming in the next few years. Be prepared!

So how to prepare yourself for a bear market? I have talked a lot about strategies lately even including the whole life insurance as my personal ultimate plan for a long lasting bear market. But inevitably for most of us, we still have to deal with stocks in our portfolio during good or bad days. That’s why Buffett’s humor on how to identify naked stocks is really a great wisdom that all of us need to remember deeply! So what he really means here? Well, it is simple and logic: stocks can generally do well during good days regardless of their fundamentals and you cannot easily identify the bad apples during a strong bull market. Only during bad days like a bear market, then you can easily find out which ones are really bad and will perform terribly. It is no secret one sector has performed extremely well in the past 10 years, the tech stocks, especially the so-called FANNG stocks, Be clear, I’m not saying the tech stocks are bad as a whole. Actually many of them are truly gems with great potentials. But the problem I’m seeing is the euphoria built up for such high growth stocks that has pushed them into unbelievably high expectations that can hardly be supported by the fundamentals on a sustainable basis. You won’t see much concerns during good days as everything can go up with the tide. But if a bear market truly hits, those hyped stocks will suffer the most and drop first and fast. We have got the first taste in the past few weeks that those highly chased up tech stocks are declining more during the correction. But those stocks quietly moving up based on their sound fundamentals are faring much better during corrections. They will also be the best ones to hold during a bear market as they won’t be naked! That’s why I’m such a big fan of investing in dividend growth stocks for long term, which will be the best ones to hold and doing fine during bear markets.

No surprise, one such stock is my beloved Microsoft (MSFT)! Long time readers certainly know very well my love in Microsoft. I first started to taking about buying it was back in 2010 (see here). I have always advised to buy MSFT at dip and the most recent substantial plunge for MSFT was about 2 years ago (see here). Since then, MSFT has almost doubled. I guess you are tired of my constantly talking about MSFT but you better hear me saying this again: If all the stocks can go naked during the terrible bear market, Microsoft is likely the only few that will stand firmly and covered with beautiful clothes. I have been very lonely in promoting MSFT over years but not anymore. It appears Wall Street, which is usually short-sighted and slow in understanding good value stocks, is finally wakening up. Here is the latest bold call on MSFT: How Microsoft Could Reach $1 Trillion in Stock Market Value. I think it is not if but when this will happen. While it is great to see the booming businesses for MSFT that will inevitably be translated to higher prices, I really hope MSFT can stay low forever for my long term holding of it as it will much fast accelerate my millions of dollar profit goal from my dividend reinvestment in it. Therefore I do have very mixed feelings about any good news about MSFT.

Be aware, I’m not talking about anything short term here. If you only care about what may happen in the next few months, don’t bother to pay attention to this. But if you are serious about your long term financial health, then you need to be very careful with what is going to happen in the next few years and you need to take appropriate actions to safeguard yourself now and immediately. Why? The market will not tell you exactly when it will start its bear market and you won’t get a switch on/off type of pre-warning. Creating and maintaining a long term portfolio with quality stocks having reasonable valuation is a time-consuming process and it will be too late when the next bear market actually strikes. My strategy for my long term investment is something that can survive well in all weather conditions. As I said I’m very convinced that we will go into a long lasting bear market in not too far future and we probably only have 1-2 years at most before we start to feel it. But I could be wrong and no such bear market may ever happen in my lifetime. The beauty of my strategy is that I will gain greatly if I’m wrong and can also survive very well if I’m right. The best approach for such an all-weather proof strategy is not those high flying fancy growth stocks as most of them will suddenly become naked when the tide recedes. Rather the best strategy is to find quality value stocks with long term track records of paying increasing dividends and buy and hold with dividend reinvestment. When this is done, you can simply forget about them and sleep soundly as the long term DRIP compounding magic will surprise you in 15-20 years with a great wealth created for you without you knowing it. Basically what you are doing with this is just like you are acting as a business owner for good companies.

So folks, for your long term financial health, always ask yourself: will you be naked when the tide goes down?

The market is behaving constructively

As I said a week ago, my gut feeling was that the market may have touched its bottom for this 2 months long correction, although I still could not rule out the possibility of any panic selloff towards 2530. I’m still holding the view on this and actually what I’m seeing now suggests to me the chance to see higher stock prices in the months ahead is much higher than a new low. The price actions of the market in the passing week, although still very volatile as expected, were quite constructive, leaning towards the bullish side. Two main technical signs to support my view:

• The market is showing a series of higher highs and higher lows, even during the panic selloffs, e.g. in reaction to the potential war with Syria. More importantly, if you look carefully at the chart for S&P, it is showing a tiny reverse H&S formation, an often bullish technical setup.
• You may recall I talked a few times about the junk bonds (HYG) that they should be trending down from its highs late of last year. It did, leading the selloffs of the stock market in the past two months. Now HYG is quietly moving up with a bullish outlook at least for the weeks ahead. Junk bonds often lead the stock market.

Having said that, just be aware this is not a clear-cut out of the woods situation and the market will continue to be very volatile with panic selling from time to time. Headline news can easily tip the market over in this very uncertain world. I’m just cautiously bullish now.

Just a quick words about a few stocks I talked about recently:

• I hope you shorted Bed Bath (BBBY) after I talked it down recently (see here). This is a bad business that I really think it may not be able to survive long without drastic changes of its models. As expected, it got haircut by a 20% crash following its earnings report due to very disappointed forward guidance. If any stupid guys are willing to catch the falling knife to buy the lows, let them do that and we can short again when it pops up as a dead cat bounce. It is simply a deadman walking as far as I can see!
• On the contrary, I’m long Micron (MU) now after my recent short as I talked here. MU also got a haircut following its recent earnings as I expected but it is totally different from BBBY. It is a great growth stock for long term but just with short term too much froth built in. As I said, I expected it to decline to $50 for its correction. Sure it just did that! It actually briefly dropped below $50 a week ago during the market selloff, which was a bit oversold to me. That’s why I took the opportunity to long MU around $50. So far so good. If the overall market is indeed moving up, I think MU will be headed much higher from here.
• I was bearish about TSLA due to the concern for its gigantic debt load. But I did think an oversold rebound was possible towards $290. Indeed we got the rebound but it appears to me to be a dead cat bounce. The bounce has been pretty strong actually and is now trading around $300. I think this is a pretty strong resistance area and a good spot to short.
• How about Facebook (FB)? I didn’t talk much about it but I’m sure all of you know what’s going on with it. The recent crash due to the privacy scandal has brought it down by almost 25%, from $195 to $150. I think the FB saga is just a political fart, smelling terribly but will be disappearing and forgot about very soon. Ironically Zuckerberg, a strong support to HC/Dem, was actually helping Trump/GOP during the election. He is now caught up in the middle, being accused by both sides (里外不是人), a deserved punishment for him. But from the investment perspective, I like FB for its long term prospects and I think this is a good opportunity to buy lows. Although the technical damage is quite severe and it still needs some time to recover, I do believe $150 is a strong support for it which will likely hold. I got in for trading purposes when it crashed to $150ish and I think a good chance it will be trading in a wide range between $150-170 in the weeks ahead.  

A nonconventional hedging strategy

I used to live in Switzerland for quite a few years and my son spent his happy childhood over there. This is a country almost everyone can love: quiet, peaceful, friendly, well-organized, truly democratic and humanely! By the way, I recently saw fierce debating on gun control. I’m not here to open the debate with anyone but just share a perspective why easy access to guns is not the fundamental cause of gun-related crimes. In Switzerland, general families commonly hold guns, even machine guns with ammunitions. Why so? Because by law, every adult man (I believe between 20-40) must spend a few weeks each year for military services. And they simply carry their guns back home during off time. But you rarely see or hear gun shooting crimes. Just a side note if anyone interested to further think about it.

So is there anything that we don’t like? Hardly any except one thing: the living cost that is really expensive. When we lived there, virtually anywhere else we went would bring us the feeling of cheapness, and often to a great deal! Fortunately Switzerland is small and very tolerant and compassionate. We lived along the border with Germany and every weekend, we just went to the German side to shop, which was not only much cheaper but we could also instantly got tax rebates. I guess most of the friends here probably could never imagine such kind of exotic unique life style. I’m really blessed for this unique life experience. In the weekends, in addition to that we mostly went to Germany for shopping, one routine we always followed was to go to MacDonald’s in the town. Our then baby son was so much loving the burgers there and especially the Happy Meals for kids. Not sure if they are still offering this as it is truly an addiction for kids because it includes also the cute toys. We are still keeping the collections of those tiny toys with great happy memories and want to pass them to our grandkids☺ ☺

So why I’m sharing all this stuff with you? Of course I’m not here to convince you to move to Switzerland but you should if you ever have a chance. Today’s idea is not about stocks but about the purchasing power of currencies. Ideally the purchasing power of all the currencies should be kept constant and the equivalent amount of money could then buy the same amount of goods. But this world is anything but ideal and there is wide range of changes regarding the currency purchasing power. Switzerland is not only rich and expensive but also unfortunately often has seen its currency, the Swiss Franc, overvalued. How do I know and measure? Well, there is an easy way to do so to compare currency valuation relative to the US$.  Here comes to my point of mentioning MacDonald’s.

Have you heard Big Mac Index (if not, check here)? This sounds funny but is actually a very easy and effective way to measure the value of currencies at a given point of time to see if one is overvalued or undervalued. Think about it. Mac burger is sold in majority of the countries all over the world and should cost the same amount as in the US if the local currency holds the constant exchange rate vs US$. But that’s obviously not the case due to various reasons. Right now, a Mac is sold for about $5.3 in the US but is sold for $6.8 in Switzerland. It means Swiss Franc is almost 30% overvalued against the US$. Among the major currencies that have ETFs, Japanese yen (FXY) and UK pound (FXB) are substantially undervalued by -35% and -17% respectively, relative to the US$. For major emerging markets, the Chinese yuan (CYB) and Indian Rupee (INR) are both over 40% less valued to the US$. See the BMI below as of Jan 2018.

With this knowledge in hand and if you want to do something outside of the stock market, then you may think about a hedging strategy by shorting FXF for Swiss Franc and going long for FXY, FXB, INR or CYB. You may likely be doing well in the months ahead as undervalued currencies tend to go up and overvalued currencies to go down by returning to the mean. In this very volatile market, try to think out of the box by doing something apart from the stocks. There are always some interesting opportunities out there as long as you are open-minded enough!

No Trade War is coming

Another 700+ crash today with Dow. Then the following news:

• A $60 billion money manager is considering selling all his U.S. assets because of the tariff fight
• U.S. investors retreat from stock funds for third week due to fear of a potential full-blown trade war between the United States and China

It is pretty scary these days in the stock market, isn’t? But here comes with my bold prediction: there will be NO TRADE WAR COMING!

 I may be wrong but I’m confident that I’m right.

We have seen a rollercoasting market in the past few weeks and I’m sure a lot blame has been credited to the potential trade war initiated by Trump. Sounds a pretty stupid move by the Trump Administration as everyone knows there is no winner in a trade war and all the sides will suffer brutally at the end. Does Trump have no idea about it? Don’t judge too fast, folks!

I must say Trump, who is not a politician at all by the traditional criteria, is indeed a brilliant businessman and US indeed needs such a businessman at the helm if it wants to get out of the super deep financial hole. I’m not here to argue with you politically but I’m sharing with you why I think Trump is doing great for the US future economically.  

Regardless which side you are sitting on, there is one thing I think all of us can agree upon: that is the US has been in super trade deficits for decades virtually with all the countries, which is not great for the US economy. I guess you don’t need to be an economics PhD to figure this out. Any president, even an economic idiot as we have seen from time to time, should be able to understand this simple fact. So why all the previous presidents would just tolerate this and even got more with new trading agreements in such a fashion? It is all to do with the US political mindset. US has always considered arrogantly that it is the only superpower in the world that can manager others’ business as its own politically and ideologically. Due to this fundamental way of thinking, US is willing to sacrifice its economic interests for the sake of geopolitical interests. For many years in the past, it was fine as US had sufficiently strong economic muscles to deal with the trade deficits. But not now anymore. Economically US is becoming weaker and weaker and there is virtually no way for it to climb up the big financial hole it had dug out for itself in the past decades. Believe or not, US is heading down towards a gigantic financial crisis at the scale no one can imagine at the moment, if the current situation is just let continue. Anyone with slightest economic sense should be able to understand this, not to mention Trump, a savvy businessman! Trump is determined to change this as he does not care much about the geopolitical and ideological interests but more for the economic interests as his top priority! So how can he effectively change the decades’ long disadvantage in trading with others?

Now try to put yourself into the shoes of all the other countries which have already enjoyed long term trade surplus for decades. Would you easily back off if the US just makes a nice request to ask you to open your market more for the US products? No one would take it seriously, right? That’s why Trump is doing what he is good at by creating a big scary issue first and let everyone know they must take it seriously as a trade war is coming if not satisfying the US demands. As expected, the whole world is scared and panicking when seeing US is raising their tariffs across the board. Of course it would be stupid to think that any country would simply give in to the US requests without retaliating first. But believe me, all is just a show, a political show to save their face. You will see a lot of strong verbal talking how they will fight back at any cost. Here is my prediction: all the major US trading partners will have to come and sit down with US to renegotiate the trading terms since none of them will have the gut to engage in a real trade war with the US. The loss for them would simply be too big to swallow, although US will also suffer dearly for sure. Guess what will be the outcome for the US for any negotiation? It will only be better for the US and no way to be worse from what is already the worst in almost all the terms! Here is the inside information and top secret I’m only sharing with you: I got a call from the President informing me what he is going to do on this issue and he has reassured me no trading war will ever happen!☺☺☺

If you read my blogs carefully, you should recognize that this has been my consistent view on the prospect of a potential trade war since very beginning. I have never worried about it. The market knee jerk reactions are just noises and will only create great trading opportunities if you can seize it during the market panic. The passing week was a great week for me as the huge panic selloff on Wed following the Chinese retaliation tariffs allowed me to close my short positions for great profits and I took the opportunity to add long positions. It seems as the day passing on, the market finally got the point I was telling all along and it mounted an incredibly strong reversal on the day with Dow jumping 700+ higher from its intraday low. This was quite bullish at a day with seemingly enormous bad news but I think the market has finally got it right. Today’s was another day with big selloff overnight due to even more tariffs proposed by Trump but at the end, much less panic was seen from the market. See the trend? Less panic reactions to the seemingly intensifying potential trading wars!

So the big question is where the market is going from here? Someone asked a while ago if I was a permanent bear as I was constantly talking about low testing in the past few weeks. I’m not and actually I have been saying consistently for quite some time that I’m still thinking some good days can continue for some time under the Trump’s new leadership. My bearish view in the past two months was more related to how the correction would evolve. But now I actually think the market may have reached its bottom for this two months long correction and moving forward, it may start its uptrend as the major direction for the rest of the year. You see, the market has not only retested its daily low at 2581 for S&P, but also very close to its intraday low of 2530ish. I think enough is enough for this correction and it’s time for the market to recover and move up. The scary potential trade wars should have pushed the market way down, maybe below the Feb low of 2530. But it didn’t and the market has help up well above its Feb closing low above 2581. This tells me the relative strength of the market, an important sign of the bottoming. The whole world is quite bearish with depressing sentiment. The talking heads are universally looking for more downside, a good contrarian indicator.  Of course I may be too early to call this as its daily momentum has not yet turned a clear positive sign, definitely not the weekly chart. So the risk is still there that it may go down further even passing through the 2530 support. But I think it is less likely although we will likely still see a very choppy and volatile market and periods of panic selling like today. Even if the ultimate bottom is not in yet, at least we should be very close to it. Let’s see how the market works its way out.

The bottom line is that we may have seen the worst time during this correction and we may start to think about the truly recovery phase in the weeks ahead. However, it is important that there is no such thing as a straight line up. The volatility will still be high and we may still see scary panic selloffs during the course. Panic selling at lows or chasing highs are both losing games in this market. Be disciplined and be patient!