Beat Amazon

Any thought how Amazon can be beaten down? I kind of beat down Amazon yesterday betting for its earnings and walked away with double incomes. Not because I knew it would disappoint. No one could know for sure and it was too risky to bet for one way. I bet a smarter way: per its pre-earnings options that suggested it could jump up or down by about 40 points, I bet it would not move up or down by 80 points or so. In other words, it would be moving around in a defined range bound regardless if its earnings beat or missed. I was happy with my overnight bets that let me walk away with full profits for both ends of betting. But this is not what I'm talking about today. What I'm asking is really how to beat Amazon business-wise.

“You must be an idiot!” I’m sure this is what I will likely hear about with this kind of thinking. Indeed, there seems nothing Amazon cannot beat whenever it wants to step in. Virtually all the stocks are doing poorly in comparison to Amazon if their business is somehow touched by this e-commerce giant. I got that and definitely I also shared the same thought until recently. When I heard about it, I thought it was a joke but when I checked about its stock prices vs Amazon in the past 3+ years, I was appalled and couldn’t believe my eyes! If I showed you the chart below for two retailer stocks, which one you would think was Amazon’s curve? I bet 100% would say the upper one was Amazon if I didn’t give you the prewarning above, right?

Of course, we are all wrong and the other stock has comfortably beaten Amazon by a wide margin in the past 3+ years, since its birth on the stock market! What is more astonishing is that this is a pure Brick & Mortar retail business without any e-commerce yet. I wish I were smart enough to know and invest in this company as soon as its IPO but due to my ignorance, I only heard about it recently and even have never seen it physically anywhere! I’m talking about Ollie's (OLLI), a discounted B&M retailer with a lot of similar products that can effectively compete with Amazon price-wise. Ollie’s calls itself “one of America’s largest retailers of closeout merchandise and excess inventory”.  Actually Ollie’s has started its business since 1982 but was only going IPO about 4 years ago. Location-wise, it is still very limited geographically and that’s why I have never seen it nearby. Not sure if anyone has first-hand shopping experience with Ollie’s. It’s said shopping at Ollie’s is just like a treasure-hunting experience, as customers rarely know what deals or products they’ll find while browsing the store’s aisles.  Here is the picture of the store. Of course with only a 4 years’ publically listed life span to date, it is hard to say definitely that it can beat Amazon but its momentum seems quite strong and promising. Ollies is definitely a great stock I will be closely watching with full interest. After all, hardly can you see anything that can beat Amazon for several years already, especially a B&M retailer against the e-commerce giant!!  I wish Ollies can emerge as a new retailing business model that even Amazon cannot disrupt!!

Powell has been hijacked

There is no more important event than this one in the world, which will occur next week. Basically all the eyes will focus on this event and the whole financial world will react one way or the other thereafter, potentially violently. If you still don’t know what I’m talking about, then you really don’t know anything about finance and should not be in the trading/investing business at all, to say bluntly! But I’m sure everyone knows what is coming next week, the most important meeting in the past few years indeed—the July Fed meeting. Why it is so important? Well, it will be the first time in the past 4 years that Fed will be virtually sure to cut the Fed fund rate again! If you recall well, the Fed had started rate cut for nearly 10 years since 2006 which brought the rate down to zero by 2015, when it started to raise rates again in Dec 2015.  

You may recall Powell was still quite hawkish late last year for further increasing the rates and he was scared by how the market had reacted to his hawkish tone and had a 180 degree about-face to calm down the market. That was the time I wrote Powell was scared and confused! (See here, here and here). It was successful by his drastic direction change with the market shooting up by 20% by now.  So is there good reason for the Fed to cut rates now? Yes and no, depending on how you look at it. Purely from the economy’s front, there is really no rationale to cut rates now with a so robust economy going so well at the moment in the US, thanks to the pro-business policies by the current administration. However, Powell/Fed has no choice but to cut rates as he is just like being hijacked now regardless whether it is against the economic norms or not. Two reasons that are forcing the Fed to do so:

• US is the only major economies in the world that is doing so well. All the others are still struggling and are all renewing the easy money policy one way or the other outside of the US, including EU, China, and Japan. The US will be significantly losing its competitive edge if it still keeps higher interest rates.
• A related complication with a strong economy and relatively higher interest rates is the ever strengthening US dollars, which is also making the US goods less competitive in exporting.

So it is just a matter of when, not if, the Fed will cut the rate. Next week, we will see the first rate cut in 4 years, which has been priced in for 100%. If Powell does not do that, he can immediately leave his post I think as the global markets will tank to the extend he cannot stand for. Based on what he did in the past few months, he has no gut for doing that! So the real question is how much and how the market will react. I personally think the reaction will likely be negative regardless.

If the Fed cuts rate by 25 basis points (0.25%), this has already been priced in and we may see a “sell the news” reaction. The more interesting reaction is what happens if the Fed surprises the market by cutting 50 basis points (0.5%). The more logic speculation is that the market will be more happy with this more aggressive move by the Fed and the market will jump. But I feel less so positive. I think the market will be frightened to see such a deep cut as it may mean the Fed is seeing something the market is not knowing that is more troublesome economically and therefore people will likely opt to run first before asking questions. This is how I see the market for the next week and how I’m positioning myself as of now. This is also consistent with what my VIX crystal ball is telling me now! 😝😍😘

The dream coming true day for value investors

It must be a heart-broken sad day for many traders for sure but on the contrary it was a great day for value investors like a dream coming true! That was the day on Jun 25 that AbbVie (ABBV) announced to pay about $63 billion to buy out Allergan, acquiring the company and its medical aesthetics business lead by Botox (see more details here). ABBV got a haircut immediately by about 15% that day while Allergan catapulted as expected. For those who held ABBV for short term trading purposes, of course it was like a hell day but I was really happy as I was actually waiting for something like this to happen! I like ABBV as it is a great company with long term track record for healthy profitability, especially its supper safe long term dividend growth history. I was waiting for a moment to get in cheaply and finally the day came on Jun 25 with a bombshell for many. This is exactly the time I have been talking for years how to use your cash to buy great dividend stocks when no one is interested, a perfect Buffett’s moment of “being greedy when others are fearful”!

Let me be clear here, I don’t think the M&A is a good move for ABBV for the sake of innovations! Not at all. Actually both companies are struggling for their pipelines and I think this is a major reason, a good reason, for traders to feel sad and dump ABBV in earnest! But for long term value investors, innovations are not necessarily a critical part in their equation. The main concern is whether or not ABBV can continue to be very profitable with healthy cash flows and high return on equity. That’s the essence of long term wealth building with DRIP that I have been promoting for years!

So what is happening to ABBV right now? Well, not a very good position for it if it wants to maintain its healthy cash flow. You see, ABBV is holding a product, Humira, that is unbelievably successful and generating sales that no one can even come close to it, $20 billion annual sales. The next all time great blockbuster is Pfizer’s Lipitor, which peaked at about &12 billion per year for sales before the generics stepped in. I don’t know if we will see another $20 billion drug any time soon. Needless to say, ABBV has been enjoying a great time with such a profit monster for years but unfortunately its good time is quickly approaching its end, in less than 3 years from now. Since Humira is doing so great, it is generating about 60% of all the ABBV revenue each year. As long as Humira can continue to do so, it is great for ABBV but when its patent loses protection, its sales will fall off the cliff immediately, often 50% or more almost overnight. Although Humira is a biologic that is more difficult to copy and therefore the post-patent cliff may not be that big, but still it will be a meaningful bite to its profit margin. That’s why ABBV has been trying for some years to boost up its pipeline in order to make up the gap when the reckoning day is inevitably coming. But it has failed several major M&As recently as the potential blockbuster candidates they licensed in or bought out all failed unfortunately. With only about 2 years left in facing the patent cliff, there is an urgent need for the management to find out something that is not only big in sales but also reasonably immune to competition. It is not an easy task folks by all means when we are talking about billions of dollars deep hole. That’s why ABBV turns to Allergan, not for its innovation but more for the existing cash flow actually, an uncommon M&A strategy. Per ABBV CEO Robert Gonzalez, smaller deals without the near-term ability to bring in $10 billion to $15 billion in revenue were a lower priority, in part because "you can't risk on a lot of binary events, because you don't know if they're going to play out or not."  Therefore AbbVie made a sea change in their strategy last month; in seeking to dig itself out of its hole of dependence on Humira revenues, the company turned to Allergan and its Botox medical aesthetics franchise- which comes with the advantage of strong branding that gives it a chance of survival independent of its intellectual property protection. Botox can generate $8 billion annual sales at the moment which is very stable and at least per ABBV’s research, it is quite difficult to copy and therefore safe to continue bringing in the significant amount of cash flow that ABBV is desperately looking for.
I personally agree with this strategy from the value investing perspective and I was happy to catch the knife when it was falling, sort of speaking! So far so good as ABBV almost immediately bounced back after the one day haircut. I cannot say the $65ish level is the absolute floor for ABBV for this round of correction but I bet it is the bottom area, barring anything more significantly negative showing up. I’m happy to hold ABBV for years to come while enjoying a 6% dividend yield that is hardly seen for a great and extremely safe stock by all means! For long term investment I’d rather use my money for such dividend growers than chasing high flying stocks that will come and go easily over time! ABBV is one of the safe bets as far as I can see for value investing at the moment.

Flashing of another indicator

At the risk of being looked as a diehard, let me share with you another leading indicator that is flashing violently. And if it plays out (no guarantee of course), the market usually follows not soon after. It is nothing really new as I have talked about it a few times before if you really pay attention to what I say here. I’m talking about junk bonds, which often lead the market by a couple of weeks. And right now, its chart looks scary to my naked eyes, poised to break down at any minute.

If you know some basis for TA, you must know the mostly used momentum indicators like RSI and MACD. Without being too complicated, the simply rule in TA is that a trend is only sustainable if it is also supported by these indicators. If not with a clear divergence, then a trend is often at the risk of turning around either up or down. Right now we are clearly seeing a negative divergence for both RSI and MACD for junk bonds (HYG). This is an early warning sign for a change of the trend direction, which should be down for this time. If you look at the chart for HYG vs S&P for this year, you will probably clearly pinpoint the coincidence of the two each time of a major turning point. Therefore, while everyone seems happy and cheering for the new highs every day, the underlying risk is also increasing for the next few weeks into the late summer. Yes, there was some selling pressure in the past few days but clearly people were just happy to step in to buy each time at little bit weakness. Maybe the real turning point will come only after the Fed makes the first rate cut. Be careful!

By the way, I’m amazed that I’m often being called a bearish guy. No, I’m not. If you don’t believe, can I remind you my call for a 20% gain (the 3000 level) for S&P at the darkest days at the very beginning of the year? How bullish I was?! Please review this blog again to see what I was saying about where the market could go and the possibility of rate cuts over half a year earlier! Now we have already got what I laid out then. Yes, I’m bearish for the next few weeks for sure as I do see an increasing risk for the market right now and that’s exactly the purpose of my blogs to tell you what I’m seeing regardless what others are thinking.  Actually the best you can call me is a swinging guy for my trading. Even though I’m generally bearish right now, I’m still doing bullish trades for selected stocks when I see the bullish side of them. E.g. I took profits last week by being long for AMZN, BA, and INTC for their weekly moves and then I became bearish for AMZN and INTC for this week. As a matter of fact, even though I see a bearish case for the overall market for the next month or two, I do see many stocks showing bottoming patterns, which tells me the sky is not falling for sure and we may still get long with something in a general falling market. BA is clearly one of them and I’m going to tell you another one tomorrow (so stay tuned!). But that kind of trades requires a lot of TA skills and one must be nimble in execution. I’m doing a lot of this kind of trades with weekly options these days for both up or downside betting. But for the general trend of the market for the next few weeks, it is clearly on the verge of turning down, not up in my view. Consider being warned now!    

A huge discount you may get

He is considered as a genius in investment, a self-made billionaire hedge fund manager. With his enormous success, his ego has run really high and sometimes he could become really stubborned for what he is doing. As a result, he lost a fortune in the past few years in Valeant and JCP, two trouble stocks that he bet heavily but held for too long and costed him billions of dollars in loss. Then he also took a huge haircut in shorting Herbalife, in betting against another billionaire legendary investor, Carl Icahn. He called the nutritional supplements company a pyramid scheme that he thought would eventually go to zero. Eventually his billion dollar bet lost a bundle in the 5 years saga.

I’m talking about Bill Ackman. Although he has greatly stumbled recently, Ackman is still a genius based on what he has accomplished during this entire investment life (about 3 decades). No one can win for all the bets; even Buffett cannot for sure. So even Ackman has lost a lot in the past few years, the overall performance for his fund in the long run is still very impressive. And now you may join his hedge fund with a huge discount. As you know, only a very small amount of very rich people can really afford to have successful hedge fund managers to manage their money and the cost is huge, typically in a fashion of “2/20”. In other words, one has to pay a 2% annual fee based on the asset value under management, which is mandatory regardless of performance for the year or even it is losing money for the year. Then one has to pay 20% of the profit for that year if there is any gain for the year. So it is a pretty heavy cost burden to join a hedge fund by all means. But from time to time there is a backdoor way opened to indirectly let a hedge fund manager invest for you, without such expenses at all! This is to buy the listed stock for that hedge fund when applicable. The idea is to catch the potential gains along with the success of the fund if well managed by the manager. I think we may have such an opportunity for joining Ackman’s hedge fund with a huge discount at the moment.    

If you are not aware yet, Bill Ackman is managing a closed end fund (CEF), called Pershing Square Holdings (PSHZF). As a CEF, it can traded at premium or discount and you only want to buy when it is at discount in general. Right now, PSHZF is showing a 30% discount to its intrinsic net asset value (NAV). In other words, if the fund is liquidated today, you can immediately get a 30% gain in theory. The crazy thing is that the fund’s NAV shot up 45% so far this year, comfortably doubling the S&P gain (about 20% for the year to date). Per Ackman, this is an “anomaly” due to the reason that the fund invests primarily in US stocks but the fund is listed in Europe. As such institution investors as well as a large number of retail investors in the US are not investing in this fund at all. Per Ackman, the fund now owns one of the highest quality collections of businesses. I think another reason is that people are still in doubt if Ackman may be able to recover from his huge losses in the recent past and therefore are quite hesitant to put money in his fund. Personally I’m not so much worried about Ackman as a whole as he is still doing fine as a fund manager based on the totality of his performance for the long run. I think the huge discount for the fund will likely narrow down towards it NAV and if so, it will be the easy gain for investors. Of course, for any investment, you always have to be mindful of the potential loss and have your own risk management in place, e.g. a stop loss or something. But the large 30% discount is already a built-in buffer for any downside risk for Ackman’s fund in my opinion. After all, you rarely have the opportunity to ask any hedge manager with a long term track record to manage your money cheaply!  And in this case, virtually nothing in terms of cost!

My perfect crystal ball

While we always say there is no crystal ball in the market, we often try to get one via various market indicators. I have followed many and each of them provides some unique perspective to give me a hint where the market may go near term or longer term. Certainly there is no certainty, especially based any single indicator. But there is one indicator which is nearly as clear as a crystal ball based on my experience. When it flashes violently, we need to get its attention if you don’t want to lose money. I’m talking about VIX, the measurement of fear in the marketplace as we all know.

“Oh, what a big deal!” I’m hearing this grumbles from most of you probably. Ok, let me explain a bit more here.

Indeed there is no secret that VIX is fluctuating daily and quickly depending on the sentiment of the market at any moment. Generally it tends to inversely correlated with the market, i.e. when VIX is moving higher suggesting investors are scared and bearish, stock markets tend to move lower. Vice versa, VIX is lower when investors are bullish and complacent, the markets are often higher. So where is the crystal ball with VIX when it moves so fast and can change the direction minute by minute？ No, there is no way to simply watch VIX and trade accordingly on a daily basis. It is nothing different from driving car in a road with the traffic lights that keep changing without a regular frequency and consistency. You can drive yourself into crazy if on such a road.

But watching VIX options, on the other hand, is telling you a very different story and actually it can be really as clear as a crystal ball! Here it needs a little bit education how the VIX option is regulated. Even if you know a bit about options, most of you are probably only familiar with the American’s style options, where you could buy a call or put option, exercise it, and liquidate the position all day long if you’d really like, although most option traders won’t do that but it is allowed per the regulations here. However, VIX options are European-style contracts, which are set up in such a way that they can only be exercised on option expiration day. What it means is that traders cannot take the possible “arbitrage” effect when one can buy an option, exercise it immediately, then sell the underlying security for a profit, if there is a discount to intrinsic value. Now think about it, if a trader has to wait till the expiration day to exercise, which could be days, weeks later or even longer, would they just buy options as freely and easily as for the US-style options? Obviously not as they don’t want to pay too much for something that may lose value quickly over time, right? In other words, with the EU-style options, traders will generally only bet with their money for something they truly believe is coming. And they are usually doing a pretty darn good job in predicting where VIX may be going in the next few days or weeks. This is especially true when there is a sharp difference between calls vs puts for the same VIX strike price, which often suggests VIX may likely be on the verge of either shooting higher or plunging lower. So watching how the VIX is priced in options can really serve as your crystal ball. The extreme condition is of course not coming often but when it comes, you better pay attention to it.

If you care what I’m telling you, then listen carefully: we are now at such a moment that VIX calls are priced in many times more than puts, meaning traders are vigorously buying calls than puts expecting a jump of VIX in the days and weeks ahead. We all know, when VIX jumps, the markets may likely drop. You may recall I told you last week that I expected a higher VIX this week. Although I got the hint from other TA indicators, the VIX call option was giving me a more crystal ball direction. When the VIX closed at 13.28 last Friday, its call options at the money for July 17 were 3 times more expensive than the same strike puts. So I knew we would likely see a hike of VIX in the coming week. Sure we got about a 10% jump on Monday just one trading day later. Since VIX is very volatile and can easily drop as well, I took my one day nice profit by closing the long VIX trade for that moment. But if you think the worst is over and bet for a higher market in the weeks ahead, be careful! As I said, my VIX crystal ball is still largely skewed towards a much higher VIX deep into August! Let’s using today’s (Friday) call/put prices for VIX as an example. Today VIX closed at 12.38. Yes, lower than last Fri with apparent FOMO ongoing. Using the closest at the money strike (12.0) to check its call/put prices for next week, you see a 10 times more expensive for call than put, i.e. traders are willing to buy 10 times more expensive call options for VIX to bet VIX will jump next week. We are talking about just in days, which is very telling. Now if we go further to another month into Aug, it is even more astonishing, something like 20 times more expensive for calls than puts. There is no way savvy VIX traders are joking with their money. I’m happy to see another great opportunity presented in front of my eyes and I did have been long VIX aggressively now.  

As I often said, you don’t need to believe me as I can always be wrong for my calls. But what I can tell you is that my VIX crystal ball is nearly a perfect “fortune teller” for me. When it flashes violently, I always listen to it religiously and then trade accordingly. By the way, following Monday’s large selloff, I did temporarily switch to the long side as I saw a bullish move coming. As I told my group, I was long AMZN, BA and INTC for the week and it turns out to be a great short term speculation. But I’m net short now for next week or so until the market tells me otherwise.   

I was interrogated for 6 hours!

Before I tell you why I like IRM so much, in addition to my brief history introduction as I posted last week, let me first share with you a personal story. Sounds a bit odd for this topic but just bear with me for a few minutes.

 

About a year ago, I got a call from an attorney informing me that I was involved in a lawsuit and I was asked by the plaintiff’s attorney to attend a deposition. I almost fell off the chair when I heard about this as I had never had any legal conflict with anyone I was aware of! It turned out it was a company to company lawsuit and I was identified as one of their witnesses due to my involvement in the work 15 years ago! Yes, 15 years ago, for which I totally forgot what it was as the issue was not part of my main daily work, but just something I was also responsible for as a department manager at that time. I cannot share with you the exact details but suffice to say, my involvement was really limited and therefore I could not recall anything what I did for it at that time. As my initial reaction with relief I thought it would be an easy pass for me to simply answer some questions, but I was too naïve! I was actually interrogated for 6 hours by their lawyers with all kinds of rather difficult to answer questions. Fortunately I was well prepared by my lawyers, who spent about two days with mock Q&A and also told me some tricks that laymen like me would have never thought about how to deal with effectively. Honestly it was a very good experience I must say and a very useful one for everyone if you ever get such a chance for something not directly related to you but you were fully prepared by a lawyer free of charge of course! While it was kind of ordeal to go through it, I really enjoyed the process as I have learnt a lot. At the end of the deposition, I got an interesting feedback from their lawyer, “I’m really impressed with your English and Q&A skill.” “Of course, I’m the father of the national debate champion”, I joked with him. In reality, following the good preparation by my lawyers, I just need to stick to a few principles: never volunteer any information unnecessarily. Better to answer simply with “I cannot recall” as needed than speculating on anything. One trick the lawyer often uses is to ask you something that makes you really stupid if you don’t answer the way they want to hear. It is a big trap that you should not fall into. It is not the time to show your ego and how smart you are or try to save your face by following the normal logic for our daily life questions.

 

So what’s the relevance of my deposition to IRM, you may ask? Well, any legal issues are always associated with abundant documents, big or small. Even for my case which was really a very tiny portion of the whole case, I was appalled to see how many documents they had retrieved from the records by both sides. Each signed paper and each email I sent 15 years ago relevant to this issue was pulled out on top of other relevant documents, a big pile in front of me. That’s why it took about 6 hours to go through all of these, one by one with questions!  Without seeing them again, there was no way for me to recall anything about what I did and said about it back then.  So as a side note, be very careful and mindful for any written notes you produce in any format. All could be used against you in a legal case indeed. Since the company I worked for at that time was one of the biggest in the world in the sector, they must have to use an archiving service to keep all the business records. The chance is high that they probably just use IRM for archiving as about 94% of the Fortune 1,000 already uses this company's services to secure their documents.  Iron Mountain stores physical paper back-up copies for its clients. The average document storage length is 15 years. This means Iron Mountain has reliable revenues it can count on moving forward. What's more, Iron Mountain is not dependent on one big customer. Its biggest customer accounts for just 2% of its revenue. So it’s greatly diversified with reliable income year in year out. As you must know, US is probably the only country that involves so many lawsuits for our daily life (personal or business). Each case contains tons of documents that must be archived for years before, during and after the case is done. But legal documents are just a tiny portion of the society at the grand scheme of things. Every day, each company or institution is producing a vast amount of documents that must be kept and archived either for a set time period or permanently for various reasons. For example I was told by the Regulatory expert that in average for each drug approval, the company had to submit two trucks of documents to the FDA in the past when paper submission was the only way for drug approval. Each year, we are talking about hundreds of drug submissions and you can do the math how many documents we are talking about. Again, this is just another small portion of our life. I guess you must have got my point that record archiving service is a huge business that must have regardless in what economic condition, booming or recession. In a way, it is a recession-proof business and IRM is the top player in this field with a long proven track record. Of course, with a fast changing world that is entering into the digital era, IRM is not sitting idle but is also transforming to adjust for the new way of life. You can read more here: Digital transformation is the streamlining of your business and its processes and models. By integrating digital technology into your ways of working, you can transform how you operate and deliver value to your customers, and keep your organization up to date with the latest technologies.                    

 

You may wonder why I spend so much time to write about this company. It is definitely not a high profile high growth Street darling type of company; rather it is really a very boring business that is not sexy and attractive at all. But this is really what I like for my long term investment: boring but must-have business that is gushing out reliable cash regardless of the economic condition. As you know I was first attracted by Microsoft 10 years ago when it was a deadly boring company and stock. It turns out to be one of the best for my long term investment with dividend reinvestment. I think IRM is something similar. Although it does not have a long track record for dividend and it only started to pay dividend nearly 10 years ago, it has been a very good dividend grower. Given its very strong and reliable cash flow, I think this will continue for long time. Since it is not a Street darling at all, no one is chasing it. So it can keep a slow but steady share price appreciation with rather high dividend yield, 8% for now as REIT. It is a perfect stock for DRIP in my mind. While by no means it can make you rich overnight, it will surely grow your wealth significantly in the long run. That’s the essence of long term DRIP investment that I like the most!

Major bearish indicators are lining up

This is what I sent to my group this morning:

It's indeed looking like a "good news is bad news" day for the market, if the selloff holds for today. I do believe we may see a bit more selloff towards the end of day. Of course, bulls can always argue that a little bit selloff is actually more bullish as it can alleviate some overbought condition. It is a valid argument indeed and I won't just say today's selloff is overly bearish. But the thing is, Wed's strong rally has put all the important indicators into the extreme overbought end and as I have said the VIX indicator is 100% reliable in the past year or so for a turning point and it is playing out exactly as I said again. Playing long for VIX is a much better way at the moment, which is what I'm doing. I think more pain is still ahead. Taking off profits with raising more cash is a better position at the moment for most people and for more aggressive traders, playing the short side is more prudent as far as I'm concerned!

Well, the end of day more selloff didn't come and the market has actually recovered most of the early losses. Bullish? You can argue for it but not me. I still think the market is poised for a more severe selloff in the weeks ahead before talking about a more sustainable leg up. The selloff today with a bit VIX rebound has finalized a not so common but virtually 100% reliable market selloff warning sign: VIX closed back inside its lower BB after being dropping below the BB in the past 2 trading days. This is an important and reliable indicator that you should not ignore, folks! Adding to this strong market selloff indicator is the Put/Call ratio. It dipped below 0.8 Wed, a hallmark of too complacent, which is bearish from the contrarian perspective. Whenever P/C ratio is below 0.8, it often triggers at least a short-term selloff to punish those who are overly bullish for the time being. Putting these two major momentum indicators together, pointing to a turning point to the downside, I won't feel comfortable with being long for the moment. I obviously don't know yet for how long this bearish setup will play out, if I'm right but I won't be surprised to see a multi weeks long correction phase in the summer towards Oct. Seasonally it is not a good time for the market in general. Let's see if I'm getting this right.

Still making money while being wrong

First let me be very frank that I have been wrong till now about the strength of this round of rally since the May nasty selloff. When S&P got hammered down to about 2750ish, I said a rebound was very likely and I was expecting it could go as high as 2900ish. But I also said that I didn’t believe that it could make new highs without another round of leg down. Apparently by now I have been proven wrong, very wrong indeed. S&P has been making new highs several times now! As expected, we are seeing FOMO again with herds eagerly to jump in whenever there is little selloff. After all, the trade battle with China is in truce and FED is poised to cut rates. Everything seems in favor for a continued uptrend for stocks, right? Not so fast! Even though S&P is indeed making new highs, it is doing so with significant divergences, specifically with much weaker performance for transportation, small caps and banks. Historically with S&P making new highs together with these major sectors making relative new lows, it is not a good sign. Actually per some analysis I have seen based on the data for the past 40 years, this major divergence has only happened two times before and each time S&P fell about 15% within two months thereafter. In addition, there is another warning actually based on the historically strong S&P performance for the year thus far. If you not yet knowing it, S&P has done something it has never done before: the best EVER performance in the first 6 months of the year in the history with a 17% gain. But if we look at the past 60 years of data (curtesy to an analysis forwarded by my friend), there were another 5 top performances for the first half comparable to this year’s. What happened in the following months?  The S&P 500 fell an average of 7.5% during the third quarter in four of those five years. The one year that showed a gain in the third quarter was 1987. Do you know what happened that year?  It then PLUNGED in October. The market lost nearly 25% in just one day, the most famous Black Monday!!

Folks, I’m not here to scare you for anything. You just do whatever you feel comfortable as I can always be wrong. But personally I do feel very uneasy for this seemingly strong rally and I do expect some sizable correction is coming. Many technical indicators are not lining up well for a continuing strong market, at least not yet for the summer! I’m not saying we necessarily see a 15% crash as the history could suggest, but I won’t be surprised to see that, or at least I want to be self-prepared for an impactful downside move in the next 2 months or so. History may not simply repeat itself but often rhymes, as the cliché goes.

For myself, I’m still making good money even though I’m wrong for my call of the peak of this rally. Literally one can still make money even if being wrong. In the highly uncertain period with a lot of volatility, selling puts is a great way to make money but it must be done appropriately to minimize the potential big risk involved. And with put selling, it is indeed no need to be perfect in terms of timing. One can make money if right or even wrong with certain degree. That’s exactly what I’m actively doing nowadays. And personally it's the time for me to take off profits aggressively with any rally now from them. I have quite a few "longer-term" positions put in during the severe May selloff for really great stocks like INTC, MMM, NVDA or even FDX etc with put selling that are expiring in 3 weeks from now. They have already jumped quite a lot since May but Monday’s big rally has pushed them much closer to my max gain I can expect in 3 weeks from now. It will be silly for me to sit with them for another 3 weeks to try to maximize my gain (5% or so left). So a big payday for me by closing all of them this week. This is indeed like “割韭菜”. Sorry for the pain of those who ran at the wrong time, allowing me to get in at the right time! I wish none of you will be one of the 韭菜!

The market may continue to move higher a bit from here and one can argue S&P may even jump to 3000 or a bit higher based on the technical trend. After all, the first week of July is seasonally bullish on top of the ad hoc positive effect from Trump/Xi’s meeting last weekend and it is only 5 points to go for S&P. Why not just to take the 3000 to make another historical day!  But I don’t believe this bullish move at all and I think this may turn out to be a big bull trap for the summer. I’m now taking the market strength opportunity to set up more short selling in anticipating a good selloff that is due to come soon. Actually today’s strong rally has pushed nearly all the technical indicators into the extreme overbought territory. One most reliable indicator is VIX. If you have been with me for some time, you probably know that it is not a common thing for VIX closed below its lower BB, maybe just 4-5 times in the past 2 years. It has been a 100% certainty so far that VIX will jump higher very soon thereafter with the market topping over in association. We are seeing this again this week with VIX is now firmly below its BB. You may notice a rather abnormal pheromone today that while the market is doing quite strong, VIX, which is usually going down strong accordingly, is not budging much at all. Actually most of the day it is in green but declines a little at closing. This is another warning sign, folks! I’m playing the long side now for VIX to expect it will jump any moment very soon. Friday’s jobs report is a wildcard as it may react wildly either direction. Seasonally Friday should still be a good day for the market but we will see. If indeed another rally day for the market I will add more shorts for sure.  The higher it goes from here, the more downside risk we will see. Opposite to the May time when I was aggressively selling puts to anticipate a strong rebound, I'm starting to sell calls to anticipate a strong selloff moving forward. That’s my game plan for the next few weeks! The beauty of this is that I don't need to be perfect in terms of timing. I expect to make more money even if I'm wrong.

Happy July 4!