A 20% jump in 2019! This was my bold prediction for S&P for 2019 on the last day of 2018 when S&P was struggling around 2500. I thought I would be laughed to death for such kind of stupidly bullish prediction when the market was in deep depression sentiment-wise. Virtually everyone was thinking how much lower the market could go in the months ahead; so how laughable I was lonely expecting for a substantially bullish market for 2019!! Of course, I'm wrong again and laughably wrong. Not because S&P dipped again since I was talking highs. On the contrary, it has been roared higher straight line for 7 weeks. It has jumped so much in so short time, it has already gained 80% for 2019. So I'm totally wrong as of now in terms of the magnitude of its potential gain for this year. Wait a minute, you must challenge me. Where the 80% gain of S&P came from, you must be wondering. Have I lost my mind again after being so wrong? No I haven't. I'm talking about the annualized return of S&P for 2019. Yes, from its 2500 to nearly 2800, the actual gain is about 12%. But since this fast up move is materialized only within 7 weeks, if you extrapolate it to the whole year for about 52 weeks, the annualized rate would be 80% if the current growth rate continues. I hope all my friends have listened to me and were aggressively buying at the end of last year and early this year. If so, a big CONGRATS TO YOU for being with me for a brave move during the darkest time period. A truly contrarian action not fun for most people to do!
But, this is a big but, after being happy and a respectful pat on your back, you got to ask yourself how many times have you ever seen S&P or any US market index gained 80% in a year? None, nichts, nenio, nulla, neitt! Maybe I'm too ignorant of not knowing it. So show me the history if it was ever seen! Of course, you may say, this time may be different. Indeed it is possible but equal to zero chance in my book if you ask me. So statistically the chance is extremely high that the market cannot simply go up without a significant pull back. The question is when, not if. So at the moment when the sentiment is blown to the extreme side (and it is on the euphoric side this time), let me be a contrarian again by taking the risk of being laughed once more to call for a downside risk now. Yes, I cannot tell exactly when the pull back will occur but it may happen any time. As I said many times before, the market has a habit to punish the most people the most! If you think you can time the market for the exact top, sure to stay on to enjoy every moment of the up move! For most people, I think it would be better to at least take some chips off the table for short-term trading positions. When the market decides to strike, it will do so very swiftly without any notice.
Fundamentally I must say I'm afraid the market has used up its major ammunitions too fast too soon. If you recalled what I wrote back then to support my 20% gain prediction, there are two major bullish movements that I thought should push the market higher in 2019. One is the Fed transition from hawkish to dovish in their policy. The other is the US-China trade deal that will move in the right direction. For the first one, while I was very confident the Fed would yield to the market, honestly I didn't expect Powell would change his tone so much so fast. Comparing his speeches in the past few months or so, you wouldn't believe it was from the same Fed Chair talking about the same thing. So I very much underestimated the Fed's speed of dovish transition and the market has got fuel for the fire. Then for the trade deal with China. No doubt it is moving towards the direction as expected. As I said, the most likely scenario should be that major progress has been made and Trump will call off the immediate tariff hike again to allow a bit more time to work out the final deal. It seems this is becoming increasingly the likely outcome for now. So both of the tailwinds are being blowing in full speed right now to push the market flying like crazy. It is indeed feeling like there is no way for the market to back down. But did you have a similar but opposite feeling that there seemed no way for the market to go up about two months ago? Just think about it and you may more easily understand the market sentiment can change very fast from one extreme to the other. Don't ever ever believe it will stay on one extreme forever. Treat the market just like a human being. He also needs a rest in a Marathon running. Too fast running for a Marathon cannot never make him a winner. It will be healthier for him to calm down a bit and take some rest before running fast again.
Hope you can better understand this cold water writing of mine by now. I'm not bearish at all for this year. I'm more confident than ever to believe that we will see new highs in 2019. But not now and not in the near future without a much needed severe correction first. The more fast moving up now, the bigger drawdown we will see in the next few weeks. That's what I'm believing the most for now!!
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