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!