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!