Cannot be better

It is the summer time, the most active period for many. For Wall Street, the old cliché goes “Sell in May and go away”, meaning after May each year, the stock market tends to perform poorly in the summer time as many Street traders become less active in trading while more active in enjoying other summer activities. Obviously, there is no assurance for that and not necessarily we will see the same poor stock market during May to September. But I believe we may see quite challenging summer this year.

I hope it is not news to you anymore that I’ve constantly been more bearish than bullish in the past few months when the market was doing a V shape rebound since the end of Dec 2018. So much so that I even heard someone calling it irresponsible to be so persistently calling for a “crash” to come! Indeed my timing was off quite a bit but I have no doubt that the recent V shape rebound was nothing more than a bull trap, at least for the time being. Here is what I said late Apr: The message I'm trying to convey in the past few weeks is not about the exact topping moment but rather that the risk is increasingly higher with the market keeping going up in the widely euphoric sentiment condition. You may miss the 5% upside opportunity by staying at sidelines but you probably will avoid a 10% downside risk by doing so.

There are many indicators that have suggested that this rebound was not sustainable regardless how seemingly strong it appeared to be. We start to see the effect from those indicators, although a bit lagging behind. One indicator I have talked about is the divergence between S&P 500 (large caps) vs Russell 2000 (small caps) and Dow Transportation index (see here).  A truly sustainable bull trend should not see such kind of major and persistent divergence. Actually even the Dow Jones itself has been in trouble to surpass its recent highs. Now we have got the first taste of a “crash”, or a mini crash with about 200 points shed off from S&P. The charts for Russell and DTI look even more bearish now with a technical “death cross”, i.e. the 50 DMA crossing below the 200 DMA. This usually means a more persistent downtrend is in the works. If this is indeed the case, then look for more downside risk in the months ahead.

Having said that, I don’t expect a straight line down from here, or another overwhelming crash coming immediately with one push down. Unless there is something truly enormously devastating that may trigger a huge and persistent selloff, the journey to the bottom in the next few months is likely choppy and volatile with many ups and downs. Last weekend I told me friends in my group that I expected to see a good selloff this week to push S&P down towards 2750ish. Lucky me timing-wise this time as we did start to see some immediate selloff early this week. The surprising Trump’s tariffs for Mexico announced last night has pushed S&P over the edge more with panicky selling started overnight and continued early today. At its intraday low, S&P did touch 2750 but immediately bounced off from it. It seems the Market God just wanted to prove I was right this time. Here is the thing. The market sentiment has suddenly shifted from very bullish just a few weeks ago to extremely bearish. You may recall what I said repeatedly that the market mood could change very fast. “It was difficult to be bearish” as I said just a short while ago to now “it is difficult to be bullish”. The AAII sentiment survey is one good indicator to show that overwhelmingly we see bearish mood now than bullish. The Put/Call ratio on Wed shot up to 1.40, a high level rarely seen (only second to the high of 1.80 we saw prior to the last Oct crash). This is a quite good contrarian indicator suggesting an extreme bearishness that is often seen at least at a short term bottom! So I told my friends it is time to be a bit more bullish now, expecting some good deal of rebound in the next week or two. Today’s dip to 2750 is really a perfect timinb for me to go long aggressively for trading purposes. I cannot ask for a better setup, right?! We may see a summer time rally now, which will likely again fool a lot of herds into the market thinking the worst is over. Some sort of FOMO may develop again to push the stock markets up. THEN, the bulls will get slaughtered once more with another leg down more severe than what we have just seen. I don’t know how low it can go at the moment but it got to be much more calamitous and crippling to paralyze most who dare not to even think about stocks! Just think about the mood we saw in Dec last year!!

Again I’m not asking you to believe me as I could be wrong, but this is what I’m prepared to trade either on the long or the short side as the sentiment shifting from one end to the other. One thing I’m quite confident to say is that you will likely see a lot lower prices in a few months for many quality stocks that you may keep for long term. No rush to buy and definitely no FOMO is my general advice, if you want to hear my dehortation!

Betting for this trillion dollar trend

Recall the stupid call that the world will end in 12 years by the rising Dem star AOC? Although it is an utterly dumb brain-dead stupidity, she has gained a lot of attention for her senseless  Green New Deal! If you don’t know yet, she is calling to ban the milking cow business as the cows’ fart will hurt the environment. She is even questioning if it is moral to have children for human beings as it is not a good thing for the global environment. I genuinely hope she will keep her high morality and will not have her children at all in her life, as it is better to have less children to be poisoned for such kind of ridiculous nonsense!!

But regardless how laughable the Green New Deal is, one thing she is aggressively promoting is indeed gaining momentum. This is nothing to do with the dumb Green Plan of course as it has already started for many years but the trend is continuing and will only grow bigger and faster. I’m talking about the renewable energy (RE). Per International Renewable Energy Agency, the cumulative expenses in renewable energy globally in the next few decades can amount to $100 Trillion. While the exact number is not important, it is surely a massive megatrend from the investment perspective that we should not ignore! You may have also heard that Trump and Democrats have agreed to pursue $2 Trillion Infrastructure Plan for the next decade to upgrade the very crippled US infrastructure. Although this is not a directly related to the renewable energy, I’m pretty sure a lot of infrastructure projects will involve some RE components and therefore this trillion dollar IP will also substantially benefit the RE sector, although indirectly!

There are tons of different companies involved in the RE sector and it is not an easy task for general investors like you and me to pick out good among bad. Of course, you can simply go with the whole sector by putting money into RE sector ETFs but I think there is a better way to invest in it. There is a company called Hannon Armstrong Sustainable Infrastructure Capital (HASI), which provides funds to RE projects that are usually in a long term contract basis. Here is the brief summary of this company:

HASI provides capital and services to the energy efficiency, renewable energy, and other sustainable infrastructure markets in the United States. The company's projects include energy efficiency projects that reduce a building's or facility's energy usage or cost through the use of solar generation, including heating, ventilation, and air conditioning systems, as well as lighting, energy controls, roofs, windows, building shells, and/or combined heat and power systems. The company also focuses in the areas of grid connected projects that deploy cleaner energy sources, such as solar and wind to generate power; and other sustainable infrastructure projects, including upgraded transmission or distribution systems, water and storm water infrastructures, and seismic retrofits and other projects.

The thing I like HASI most is that this is a company with a very diversified exposure to RE, i.e. a safer bet for this long term megatrend. Even better, HASI is structured as a REIT and as such, it pays a high dividend yield for investors. At its current price around $26, its dividend yield is as high as 5%! So you are basically rewarded by its income sharing when you are riding on this trillion dollar mega RE trend. This high income potential can greatly buffer the inevitable market volatility and will help you stay on the trend as long as possible!  

Is Baidu’s fallout suggesting something?

A 60% haircut within a year! That’s what is happening to Biadu, the Chinese version of Google! As you can see the chart below, this is not just an one time short-term faltering but rather more likely a long term fallout for BD. After all, it has broken down from its long term uptrend, and big time! This is ominous by itself but I’m afraid there is something more to it. Let me explain.

 
No secret that BD is one of those protégées that won’t be able to stand up comfortably by themselves. You see, in the past decade it has basically got free pass to the world biggest market without any competition simply due to the government’s protection against foreign players, mainly Google. I don’t want to get into political debate on this sensitive topic but needless to say this artificially created moat has enabled BD to be the only one to profit from this fastest growing search engine market. The past 10 years have been the period for an explosive expansion in online businesses and BD has one of those benefiting the most. Unfortunately monopoly always leads to corruption and ill business behavior, no exception for BD. Greediness has let BD do something really disgusting in order to make more money at the expense of consumers’ interest. The most notorious example is the so-called “paid for prominent placement policy” for its advertising business, the main bread-earner for BD. Basically BD would place anyone who was willing to pay highest ad money to the top search position regardless of legitimacy.  The result? BD has made enormous money but its search results can hardly be trusted as widespread fake businesses are often listed or shown at the top of the search result. This loathful business practice has eventually costed life with some fatal outcome involved due to fake information on healthcare related products. Although everyone in China now knows anything coming out from BD search cannot be trusted, nevertheless people living there have no other choice to go around as there is nothing else available as a good alternative on the same scale. I guess you don’t need to be a genius to figure out what could happen to BD if Google were allowed to compete for online search, right?
So BD had been really in a tear in moving up in the past decade or so, so much so that it has even easily beaten Google by a wide margin in terms the stock performance. One could have made much more money with BD than Google in the past 10 years although businesswise, Google has evolved into a truly wonderful congregate with a wide range of touches into many different areas in addition to its main search engine business, when BD is busy with how to effectively cheat consumers.  But finally its “glory history” in terms of stock price appreciation may have come to its end. Since a year ago when it peaked around $280, BD has entered a downward trend. The past month has been extremely dreadful for it as it has declined over 30% within weeks with a waterfall type of crash. While it is not a surprise at all to me to see this persistent downtrend for BD, what makes me think more is the recent freefall in the context of the escalating US-China trade battle. No secrete that I don’t believe at all there will be a real trade war and a trade deal will be signed off sooner or later as I have said many times. Maybe the market is telling us something that a trade deal may indeed very likely, in which among many other concessions by the China’s side, the strict restriction against other competition for the online business may also be loosen somewhat. In other words, we may start to see something to be worked out that will allow Google to be able to operate again in China. If this is indeed the case, watch for the demise of BD if it does not immediately truly transform itself to a better business operator. Before we see that, BD is not touchable as an investment, although swing trading could still be done due to its volatility. I could be wrong and I may be thinking too much about it but this is how I’m seeing Baidu at the moment!       

Better to stick with TA

I talked bullishly lately for Boeing which has the 737 Max saga ongoing. In the most recent blog just a couple of weeks ago, I said $360 could likely be the bottom for BA. Of course, I have been proven wrong by now as BA has briefly breached the $340 handle this week when the whole market was in panic selling early this week due to the intensified trade war tantrum between the US and China. Although I could argue that it was the overall market condition that led to the weakness of BA, not by BA itself, still I’m wrong in terms of its price action. But I do want to highlight one interesting point about TA for BA, which has actually predicted this long before my recent call. If you didn’t notice, here is what I said back in March when BA was initially tanking due to the 737 Max tragedy:

I won’t be surprised to see a fast rebound towards $400 after such a swift downdraft, but I think there is a high chance of at least another leg down to test its lows and it may even go down further towards $350ish level.

In other words, my TA analysis back then has already mapped out the most likely price action for BA in the following weeks: first shooting up towards $400 and then followed by another big “crash” towards $350. Although the trade war scare has made the BA price action even worse with more decline below its $350 support, BA has largely followed the path predicted by its initial TA! Given the breach of this important support, the near term future for BA is more murky as it may struggle for a while now around $350. But my faith in BA has not changed at all! For long term investors, this recent weakness of BA should be great news as its long term prospect has not been tarnished at all. It is just a short term ripple that it will dissipate soon. BA’s fundamental remains as strong as it has been. Don’t miss the opportunity, folks!  

Be prepared for more downside

What a 5% drop could do to the market sentiment! Compared with the straight line V shape bounce in the past 5 months, a 5% drop should not be a big deal at all and it should be considered as part of normal price variations, right? But most people definitely got scared by the seemingly sudden plunging of the stock market. The fear index, VIX, shot up over 60% within days, the sharpest moonshot since the scary market crash end of last year. No need to say, the harsh selloff early this week has caused some extreme oversold condition not seen for long time. Investors have got increasingly shorter memory nowadays and what has happened 5 months ago seems a long history before that has been totally forgotten by many. So just a small hiccup has spooked the whole market. On clear indicator for the extreme fear is the CBOE Put/Call ratio, which jumped to 1.30 early this week. This is an extremely high P/C ratio rarely seen and often at the times when the market is at extreme panic but it is a good contrarian indicator that a swift rebound is very likely in such kind of condition. That’s when I told my group that I was actively buying stocks and shorting VIX, betting for a quick turnaround. Luckily it did happen this way in the past few days. Actually I was thinking we could see another up day today before heading down but the market couldn't hold up well before the weekend.  

One can aruge that the market may chop around to continue go up if the trade battle does not escalate immediately. Even it happens that way, I don’t believe this rebound at all for its sustainability! If you are already scared by the 5% dip, be prepared to think ahead what you need to do if the market drops by 10% or even 15-20% before this correction is done. I don’t have a crystal ball of course and I could certainly be wrong but I feel more confident now calling for such a more severe downside risk facing us! Believe or not, the current chart pattern for S&P is eerily similar to what we saw in 2000 and 2007. I guess you don’t need me to remind you what had happened in the months after that time, right? Just be clear, I’m not saying the 10 years long bull market has necessarily finished by now. I still think there is a good chance we may see a final melt-up top before the ultimate end of this bull run has come. But as I have argued for quite some time, a more severe correction is very likely before we see a more sustainable Melt-Up run. I stick to my view for now!

 

Trump just wanted to save me!

It almost like Trump just wanted to save me from further getting eggs on my face😂😏 You see, I have been talking about a potential severe correction for quite some time but the market has kept going up. Apparently Trump cannot let it continue and therefore has "manufactured" a mini crash  by announcing the tariff hike to scare the market down! It works. Thanks, my friend!!


Joking aside, here was the note I posted to my group last Sunday evening (May 5) following Trump's unexpected Tweet on the tariff hikes for China.


"Interesting I'm viewed as bearish. In a way, yes, I'm very bearish for the time being but probably not the bearishness as perceived. Remember I called S&P500 all time highs this year to 3000/20% at the very last day of 2018? (See my blog "A 20% jump in 2019").  I could be called stupidly bullish when virtually the whole world was crying and panic for more crashes to come. Not me at that time. So I'm not bearish at all and actually I'm still very bullish for an ultimate Melt-Up phase to come before this decade long bull is finally over. But I don't believe this MU phase will come in the current sentiment with a straight line up V shape recovery from the Dec crash. You can say I have been wrong by now since I honestly didn't expect a new high straightly from the Dec bottom, even though I was among the very few, if any others back then, calling for new highs this year. But still, I don't believe this new highs are sustainable with the current sentiment. 

Now with Trump's sudden threat for new tariff hike to China, will the market "crash" from here? I don't know. We have seen how resilient the market has been in the past few months and we may very well see the attempt for continuing the resilience for a while at least. In other words, it is possible we will see a quite harsh selloff tomorrow and probably for a few days, but the attempt to rebound for new highs may still come thereafter. However, I do believe, any such attempt may very well fail eventually and I won't be surprised to see a 10+% correction before this mood-adjustment is done. Without that, I will continue to doubt the sustainability of the new highs and whether a truly blow-off Melt-Up will come."

And my note on May 7:

Bulls are out of luck today. I thought they would mount another bounce back by closing but they couldn't. Now S&P has clearly broken down from its important support, which will open the door for more downside risk in the weeks ahead. Of course, it won't be a straight line down and we will still see many bottom fishing attempts to push stocks up in between. But I feel more confident to say the current 4 month rally is likely coming to its end. Any attempt to recover to new highs will likely fail in the near future. A more sustainable new highs will only come after a more sizable correction. I have seen 15-20% correction estimate from some savvy traders.  You don't need to believe me and you can still chase highs from here but just be prepared for a real "crash" that could come in the weeks ahead.

About a week ago I told you guys that we had seen historically high volume of short bets for VIX when it was around 12. This was usually the time VIX would jump quickly. History has again proven to be smart. VIX has jumped almost 50% within days. If I'm correct about the more downside risk, then we will likely see more volatility with VIX to jump around. Again be careful during this time and don't risk anything you cannot lose! Although my timing was not perfect, I'm happy to cash in now from my long VIX bets and I'm actually expecting some good rebound soon as a dead cat bounce within a week or so. This is just part of my swing trades for up or down based on TA.

Well, it's too early to say if the market has clearly entered a correction mood as I could be wrong again with the market just shaking off the scare in the past week and marching to new highs again. But I continue to bet, even if we see new highs, it won't be sustainable and we will see more selloffs in the weeks ahead. An expectation of 15-20% correction from the top by some very savvy traders should not be scorned off, at least not by me!




In this kind of volatile market, swing trading is one way many traders are using but it requires strong TA skills to precisely spot good resistance and support levels on a timely fashion. Another good strategy is to bet some stocks will be more range bounded, i.e. not going down or up too much but within a limit defined by upper and lower band. Iron Condors or more aggressively Short Strangle is a good option strategy for this trading. The beauty of this strategy is that you don't need to know precisely where the stock price will land during a period of time, as long as it is within the range you define. For example, in the past month, I was betting Amazon would not go below 1650 or go beyond 2050. Anything in between would be my max gain with the iron condors I put in place. I have another week to go till May 17 for expiration but it looks quite likely this will be the case for Amazon! 


Following my post Thu night to bet for a rebound, the Market  responded with a sharp plummet to start on Friday. Market God never makes traders life easy. I bet not many people were actually buying yesterday when in a good part of the day it was selling hard. It really needs strong resolve and belief to buy in such a day. But at least I hope the decisive turnaround by end of the day was not a big surprise to you. I believed it and I did buy more yesterday! The best trade is shorting VIX. If you pay attention, you may notice even at the time the market seemed to fall apart again, VIX didn't budge too much. Relatively speaking, VIX didn't show panic too much when the market's wheel seemed to fall off again. This is another angle to suggest a big turnaround was coming. It did at last yesterday! Watch for more rebound next week, barring any big negative surprises over the weekend of course.

 

Another "rip your face off rally" moment?

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.
This was the crazy prediction I made on the Christmas eve when the market was falling off the cliff and everyone was scared to death and running to hide. Not me and my bold call indeed happened with a furious rebound in the next few days if you recall. We may see another "rip your face off" revenge rally soon, which may be even starting tomorrow but very likely in the next few days even if not immediately. The harsh selloff for the week has made most people on the edge with VIX jumping more than 50% higher within days. Complacence and FOMOs chasing highs in the past few weeks must have been killed by just a few days of market tanking. Now we start to hear more talking about 10-20% correction of the market. Actually I do believe it is very likely in the next couple of months to see it but not in the next few days. Instead, I think a furious rebound may more likely come first, which could lure herd people into bottom fishing again, who will start to chase highs again, thinking the worst has already passed. But let's put this part aside for now and be prepared for the immediate market movement first.


My aggressive shorting positions in place have finally rewarded me handsomely. It is time to take them off and bet for upside now. While Trump hasn't called to brief me what he is going to do, I think he would call his friend Xi tonight and get a verbal deal to postpone the tariff hike for another couple of weeks. That should be big enough to trigger the revenge rally I'm talking about. I could be wrong of course but I'm betting for it now. Technically the market is set up for a strong rally regardless for whatever reasons😇👌 

One thing that has not and may never change....

We visited France again last week after 25 years. 25 years is a long time and many things got to have significantly changed! Our son has grown up from a toddler when we first brought him to Pairs to a mature young man now. Last time when we were here, he often sat on my shoulder when we walked around but nowadays, he is moving around the globe without the need of our support anymore. He is currently studying his MBA at the famous INSEAD located in the beautiful small town, Fontainebleau (枫丹白露，what a beautiful Chinese name!)

So we came here to visit him but he was so busy with his study and exams that we actually only got a chance to have a dinner together. On the day of our departure back home, he was leaving to Lebanon/Beirut for a short visit with friends after the exam. One beauty of attending the extremely international INSEAD is a great networking power. They have 500 students this year from over 80 countries. Given the prestige of the school and not so cheap tuition and living expenses involved, even those coming from the underdeveloped countries are generally those with very good family background with a lot of local network. In this case, their two Lebanon students are organizing everything for over 50 schoolmates to visit their country for a week. Without good network there, it’s hard to imagine they can easily do that! After that, he will fly to Singapore for two months of study at the INSEAD Singapore campus there and then doing his summer interim back in Paris. So if your kids are thinking to study MBA, I’d highly recommend this INSEAD. It is not only more efficient and productive with just one year term (still not cheap though), it has a lot more networking power useful for their career! My personal bias of course!

 

 

 After this digress, France has changed a lot in many aspects. Over 25 years ago, there was no mobile facility and everything was still organized by hardware-based systems. Nowadays, virtually everything is reachable with just a few clicks on your mobile phones. One very notable change I have felt with is the attitude of French people towards English. Back then, French people were notoriously stubborn to avoid English at all cost. Even if they apparently could speak English, they would just talk in French to you. After all, they were so proud of French and afraid of the English invasion that they refused to use English to the max possibility. So back then, without knowing French, it was not easy to move around, especially when there was no online information to help. But not this time. I’d even say astonishingly nowadays how easy to communicate with French people with English! I guess the young generation in the past two decades have grown up in a world that is more open to the outside world and apparently they are happy to share information in English now. A big happy surprise!

But even though we have seen so many things that have changed since our last visit, one thing is still remaining the same, smoking! If you don’t know, French people are famous for smoking and it is especially true for young ladies, which may be viewed as a fashion there. After living here for so long, we are used to a world without much smoking smell around. But not in Paris! Still you smell the smoke everywhere in the public. For sure more and more people are smoking via vapor now but still you smell easily wherever you go. This is exactly why cigarette companies are so resilient and long lasting regardless how the entire world has changed with new life styles. But addiction is addiction, which is powerful and not easily to change. That’s why I don’t think much will change and probably will never change for the cigarette companies in terms of their business continuity. Of course they will adjust their business model due to the changing smoking habits, e.g. more e-cig or coming cannabis-based products, but their profitability is virtually guaranteed forever as long as people are still addicted to their products! While I’m not promoting smoking in any sense here, I do like the reliable income stream from the cig-stocks like MO or PM. Their stock prices may fluctuate, their dividend will continue to rise over time. The observation in France has reinforced my view on this. This is one type of safe stocks that you can safely keep in hedging against the inevitable financial crisis we are going to face down the road!                         

It is apparently addictive

There is no way the market can be totally satisfied nowadays! Since Powell took over the Fed helm about a year ago, he has done 9 times news conferences following the meeting and each time he was met with selloff as an immediate reaction to whatever he would say. He started with a quite hawkish tone initially to give the impression that his Fed would keep hiking interest rates for a long time. The market was angry with furious reactions with “a lot of colors for Powell to see see”. That’s why Powell got quite scared with a market crashing by 20% (see here). He got to do something to save the market and he did just that. With the about-face, he drastically changed this tone from very hawkish to very dovish to has basically raised this hands to promise that the Fed would not raise the rate at all for this year. Yes, the market liked what the new direction the Fed was taking after digesting all dovish doses and has mounted a non-stop straight line rally for 4 months since the year end. So one would expect the market should keep going up with a positive reaction this time when Powell basically is singing the same song that no rate hike is coming any time soon, right? No, nixie, uh-uh! The market again was not happy and fell notably during Powell’s NC. This time, the market was not satisfied by no rate hike anymore, it is actually looking for rate reduction, i.e. a new QE to come soon!

 

Yes, this bull market is the longest in history for over 10 years now. You can name many factors that support this fantastic bull run but the most fundamental and critical factor that must be available is the cheap money that can be printed whenever is needed. In a way, the market is now like an addictive patient who cannot survive without continuing to receive the “opium”, the easy money printed by the Fed. As soon as it sees the possibility of their opium being taken away, it will immediately show up its withdraw symptoms by tanking the market that will frighten the Fed. Poor Powell/Fed! I don’t know how they can ever really pull the market from this addiction. Although not an imminent threat, it is just a matter of time, not if but when, the next debt-driven recession will come. Given the debt load that is keeping piling up and we are seeing a historically high proportion (1 in 6) of zombie companies that will sooner or later fall apart due to their inability of generating even enough income to pay the interest of their debt, a gigantic bubble blowup will come inevitably. We are just waiting to see what is the last straw to drop to pick the bubble. And the Fed will be forced to initiate another round or rounds of QE for sure. Mark my word: this will be so severe that the Lehman Brothers in 2008 will be just like a beach walk when the next debt crisis tsunami hits us. I obviously don’t have a crystal ball regarding the exact timing but we probably will see more and more sign within the next 2 years that the tsunami is coming!

 

I will share more what I’m doing to prepare for the inevitable calamity. The last thing we want to see is that the wealth created by our hard work will be severely diminishing due to the crisis. This is especially important for those who are moving into the retirement era (me included) when a recovery from a prolonged crash will be more difficult due to shorter time span available for us.