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!