No fear of fears

I wrote a blog entitled “Fear of no fear” (see here). Sounds a bit odd but it basically means that you need to have a lot of fear when no one else is fearful about the market. This usually happens when there is a widespread euphoria and everyone is happy to chase highs. You hear “new high” again and again and those talking heads are eagerly telling you what will be the next new high. This is the moment you ought to be very fearful, as what the master investor Buffett has taught us! After a brief selloff in May, we have witnessed two months of relentless rebound that has taken out all time highs (S&P) many times within just a few weeks. That’s time I’m typically having fears and as I have repeatedly advised for caution, I’ve even left the impression for many that I’m always bearish. Till this week!

The market tone had totally changed with the Monday’s worst selloff this year. That was the time I sensed an intensive fear I haven’t seen since last Dec. The fear index, VIX, jumped by 50% within the day, which was rarely seen. Technically speaking, many TA indicators had reached to the extreme bearish point we only saw at the deep plunge back in Dec last year. It seems all the sudden everyone became bearish, fearing that the end of world was coming. That was the time I turned to bullish, the time to have “no fear” among abundant fears. As I said, I was actively buying for long and shorting for VIX on Monday. And I added more long positions at the exhaustive panic selloff on Wed. Apparently it was a very profitable move. As I have expected, the mood by Friday could be totally different from Monday’s and it appears we are indeed seeing more bullish sentiment now!

I’m not here to brag for what I’m doing but more as a sharing on some lessons learnt. I have been in this market for quite some time and have learnt a lot from all kinds of mistakes. One biggest lesson I have learnt is how to effectively become a truly contrarian investor or trader. That’s basically go with “Fears of no fear” or “No fear of fears”, my summary for Buffett’s “be fearful when other are greedy and be greedy when others are fearful”. As human beings, we all have the tendency to go with the herd and feel more comfortable by doing the same thing everyone else is doing. I’m not totally immune to it and from time to time, I may still fall into this mentality. But I have become more and more comfortable to go against the herd when trading, which is often more profitable than the herd move.  

But let me make myself clear again, I’m only bullish for a very short term and I don’t think we are out of the woods yet. I still think there is more downside risk ahead of us and we need to be very cautious from here. I was targeting the S&P 50 DMA around 2930ish. I thought this was a reasonable resistance that the market might have some difficulty to overcome but we got and surpassed it already yesterday! As we have seen many times this year, the herd with FOMO mentality tends to overshoot in either direction. So I closed all my weekly long options yesterday with a great profit by just a few days.  

Although we may still see a few days of upside momentum, I highly doubt we will see all time highs any time soon. We will likely see new lows first before new highs. I will use technical indicators to spot extreme overbought conditions to guide me for the next BIG SHORT! For now, I’m just happy to take profits from the short term long positions as the market moves up.