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!
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