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!