On the way to MARS

It is truly a historically moment by any standards. The first ever rocket launch to shoot astronauts into the space is done by a private company, SpaceX!

The launch of two astronauts in a SpaceX Crew Dragon capsule atop a Falcon 9 rocket was scheduled  on Wednesday but due to the bad weather it has been postponed to Saturday, i.e. this afternoon. Fingers crossed that it will be a successful launch to allow the history to be made gloriously💪💪

The launch to the International Space Station from the Kennedy Space Center in Florida will mark the first time astronauts have been sent into orbit atop a rocket and in a capsule both developed and owned by a private company. Tesla CEO Elon Musk also serves as chief executive of SpaceX. The launch also will mark the first time in nearly a decade that American astronauts - the crew this time is Doug Hurley and Bob Behnken - have been launched into space from the United States.

The only reason why NASA considers to let its astronauts ride on rockets made entirely by a private company is that SpaceX has proved to be a very reliable, relatively inexpensive, and well-managed company. In the past decade, it has launched about 100 rockets, many of which have safely returned to Earth. SpaceX is dominating the industry while achieving a market value of nearly $ 40 billion. Achieving this result requires the efforts of many smart and hard-working people, but it is Elon Musk who, with his boldness and "changeability", makes this possible.

Believe or not, Musk has a much bigger ambition: he is dreaming to send humans onto Mars some day. This is usually something that can only be managed by a superpower country like US but Musk has proven again and again that he can deliver something unthinkable! Successfully sending astronauts into the space is the first solid step towards this ambitious goal.  I really hope SpaceX can be as successful as his Tesla as I have a stake in it. A few years ago, I was invited to invest in a private placement for SpaceX which I did fortunately. While such kind of investment in early startups is always risky with a lot of uncertainty and a high rate of failure, I'm happy to take this risk with Musk. Like him or not, he has have proven to be a business genius who can deliver something no one else can deliver. Who knows, maybe someday my investment in SpaceX can turn each $100 into one million, just like what early investors got from Uber. Sure, this may sound like a unrealistic wild dream that will never become reality, but having a good dream is better than not having, right?!😇🤗

Act like schizophrenia

As I said many times before, the market swings its mood constantly and widely. It is hard to believe just about two months ago, the overwhelming mood for the market was extremely depressing like there was no tomorrow to come. Then in just two months time, we see euphoria everywhere. This is typically like a schizo with the mood swinging from depression to euphoria within hours and days without much rationale. As I alluded to last week, I was expecting a good up-move for the market this week but I thought it would stop around 3050 level for S&P. Sure I'm too pessimistically wrong as it handsomely broke out although gave back and came in within 3050 by closing today. But it looks like and I won't be surprised if S&P wants to march toward 3100 next week. Having said that,  just one small warning: the market is setting up again for a quick 100-200 mini crash at any moment. The same setup in the past few months has triggered such kind of plunge 3 times already. Will this time be different? I doubt!

In this kind of highly emotionally charged market, traders really need to act like a schizo and swings their mood quickly instead of being stuck in one end. That's probably the only way to survive the market instead of being slaughtered like pigs. Give you an real example that I have been playing with till now. Early this year, I posted a case analysis about my bearish view on AMD, arguing that for the next few months at least, AMD would be in a tough spot after challenging its all time high in Jan. Well, maybe just luck on my side with the Mar crash, AMD indeed has undergone some difficult time in the past 5 months or so. I initially set up a bearish put spread with a long arm for 2021 Jan $45. During the past few months, AMD has gone through a roller-coasting journey. While my longer term view on AMD is till bearish, it does not mean I must be bearish for it at any moment. Rather, I just act like a schizo in terms of mood swings and ride with it up and down several times. By constantly changing my short arm for bearish or bullish bet with my 2021 Jan $45 put intact, I have harvested not only all the cost for the long term put premium but have made much more than that. In other words, by swinging like a schizo, the trade has been changing its short term direction constantly that has enabled me to earn short term incomes from it. It has become a mini income machine for me at the moment. Even it suddenly changed its course and become super strong in the uptrend to move up from here, I won't lose anything now with good gain already secured. But I doubt it is out of the woods already by now. Rather, judging by its TA, I think it is vulnerable as the whole market for a swift downdraft. How low can it go? I don't know but low $40s seems again a reasonable target for it as of now. My trade is already set up for this potential sharp downward move again for it! 

Another Luckin moment is coming?

Still remember the Luckin moment a few weeks ago? Back then, Luckin, the so-called "Chinese Starbucks" was trading around $30s and I was targeting it to decline towards $20. Then suddenly overnight, it crashed down below $10. Why? It was found to be involved in accounting frauds! Lucky me? Not at all unfortunately😵 I didn't consider this black swan event but only relied on my TA analysis and therefore I used a special calendar spread, which would only make money in a specific range. It was way below my range and therefore I didn't make money at all😤😠 By the way, now Luckin is trading below $2 on its way to nullification!

Now we may be seeing another Luckin moment coming. This time, another Chinese company for online education, GSX Tecedu. Again, it is being accused of being involved in fraudulent activities per the famous Muddy Waters Research, which was spot on in their early warnings about Luckin Coffee.  Here's the summary of the accusation:

We are short GSX because we conclude that it is a near-total fraud. We conclude that at least ~70% of its users are fake, and we think it's quite likely that at least ~80% of its users are fake.Our conclusions are based on GSX's own user and attendance data files (i.e., this is not from "scraping" data). We downloaded GSX's data from more than 200 paid K-12 classes covering 54,065 unique users. In addition, a former GSX manager corroborated our analysis, and explained various details of GSX's extensive bot operation.Based on the near total faking of users, we assume that the fraudulent portion of GSX's revenue is at least equal to the percentage of fraudulent users, although it would not surprise us if the ASP on the real portion of GSX's business is fraudulently inflated too. We conclude that GSX is a massive loss-making business. Without users, there is no revenue. We also conclude that GSX greatly understates expenses. Regardless of how one cuts it though, GSX is an almost completely empty box.Amazingly, Chairman Chen has found a way to make GSX shares even more dangerous for long holders – he has pledged at least $318 million of stock. Long holders of GSX face the risk that the margin lenders will be forced to aggressively sell the stock, crashing the price.

Of course, accusation is accusation  and we don't know for sure yet if these or some of them are indeed the facts! But given the reputation of Muddy Waters in hunting for fraudulent companies in the past few years, don't just ignore it, especially if you are holding the GSX shares right now!

Where is the value?

The market strength is remarkable for sure. While I continue to suspect the sustainability of this rally, as a trader, I have to honor the price action of the market, which will be underestimated to say it is just strong. After it broke out from the sideway box between 2750 to 2950 for S&P, its next target will likely be the 200 DMA around 3000 for now. We will probably see it next week or even a bit over toward 3010ish. But be aware, unless it can break out from its all time high around 3400, don't simply believe the bear market is over. It may very well still just be a bear market rally at the end. Actually I start to get the same feeling back in Jan/Feb when the market seemed relentlessly bullish but its technical indicators sent out numerous warning signals. We are seeing such a dichotomy again right now. Don't be too complacent. 

For now, the best thing to do is to make swing trades, long strong stocks and short weak ones. That's what I'm actively doing these days. So far so good. As I alluded to last week, I was long S&P this week although its strength was a lot more beyond my expectation. After harvesting some gains this week for the long side, I'm still holding some long positions for next week but I start to gear up for the short side if S&P indeed challenges the 3000-3010 area. 

While overall the market is super strong, one particular sector has been largely lagging behind. That's the Financial. See the Financial to S&P ratio, which has declined even below the 2008 financial crisis. This is one of the important indicators that suggest the market may not be ready to simply move up here to new highs without the support from the Financial sector. Usually Financial should be leading the market in a healthy bull market. We are definitely not there yet!  

On the other hand, this is probably the blood in the street moment for Financial to look for values. Just pass on some interesting thoughts from Doug Kass of Seabreeze Partners, who shares his bullishness on the banking industry:   

• The robust level of bank industry "war chests" are being underappreciated by investors 
• The Banking Industry, as measured by earnings power (before LLP and one-time charges), reserve (and balance sheet) strength and loan diversification are well positioned to absorb loan losses in this cycle and to emerge strongly in the years ahead
• The recent and abrupt global economic downturn should prove short-lived 
• Banking industry share prices and valuations (absolute, relative, and measured against book value) are undeniably low and discounting an extended economic crisis
• Contrarian investing is simple but not easy 
• Opportunistic investors might recognize that the conditions currently facing the banking industry might provide the exact time in history to buy bank stocks – just as it was buying savings and loan stocks in the early 1980s

For long term investment, this may be one of the few that is attractive with some values. 

This bond market signal indicates the bear market isn’t over yet

• As I said before, bond investors are much more savvy and smarter than stock investors as the former is much less emotion-charged but more deeply in the fundamentals of the companies. So when they send a different signal, you better pay attention to it. Don't be fooled by the stock market sentiment and ignore the bond market signals. Let's first see what the bond market was telling us in Jan when the stock market was making new highs every day.

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• The 10-year bond yield had topped in the mid of Jan, a major warning signal that something devastating was coming but who in the stock market cared? They pushed the market to new highs day after day, so-called melting up till early Mar when it finally crashed by over 30% within days! OUCH!!
• Even more telling, the bond market was bottomed a couple of weeks before the stock marketed finally stopped bleeding, a truly MASTER leading indicator!
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• That's why bonds are called a canary in a coal mine!  If you don't know the backstory… In the early 20th century, coal miners discovered that canary birds could be used as an early warning signal for the presence of toxic gases. When the canary got sick, or died even, that was the miners' cue to evacuate the mine. So by carefully watching what the bond market is doing, it may help to detect imminent disaster in the financial markets. So what the bond market is telling us now? BE CAUTIOUS!

• Stock markets have rallied in recent days, fueled by unprecedented monetary and fiscal stimulus from central banks and governments, and efforts to reopen economies following prolonged lockdowns. In a note Monday, Longview argued that high-yield corporate bond spreads have signaled the end of every cyclical bear market since they started being recorded in 1997.
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• "On this occasion, credit spreads are not confirming the end of the bear market. Over the last 6 - 7 weeks, the S&P 500 has rallied 34% from its intraday lows. Credit spreads, though, are little changed (tightening from 19.4pp (percentage points) to 17.6pp)," the note said.

  "That type of muted price action in credit is normal during equity market relief rallies within a bear market."

• As a bear market nears its end, credit spreads narrow aggressively as the equity markets rally, Longview economists said. Within seven weeks of the end of the bear market that originated during the global financial crisis in 2008, spreads tightened by more than 10 percentage points, they flagged.  
  

• To put it in a plain English, the bond market is telling us that the danger in the stock market isn't over yet and it still sees a high risk existing at the moment. Of course do what makes you most comfortable with and you can totally ignore this warning. Just don't panic if indeed the next major selloff is coming!! 

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Buy high and sell low

First of all, my crystal ball has not failed me and worked perfectly this time again. As outlined here, my fortuneteller was telling me that a jump in the VIX was coming, which should be associated with a sizable drop in the market. Well, we got exactly that this week, a hike in VIX together with nearly 200 points decline in S&P. After such a fast selloff, it is understandable that the condition is a bit oversold and an attempt to bounce back is likely. So expect to see some buying pressure next week. But if you think this means a sustainable bullish trend from now on, don't be so fast. 

  

If I'm telling you that general investors are constantly buying high and selling low, would you agree? Hardly anyone would but this is indeed a reality. While there is no direct stats to prove that, the long term overall return for average investors should be able to tell the story. See the chart below regarding the annualized returns by asset class in the past 20 years and as a comparison, the average return for general investors. And the average investor's returns are shockingly low, even not keeping up with inflation...... at about 1.9% per year!!

You may ask how this can happen and who to blame. Well, investors themselves are most often to blame. They tend to keep their eyes on the rump in front of them. They follow the herd and act accordingly - throwing the babies out with the bathwater at market lows and buying tulip bulbs hand over fist at highs. A typical "Buy high and sell low" herd behavior, which is a surefire strategy for financial ruin.

Still don't believe it? Then ask yourself, did you buy during the devastating selling in Mar when I said a 20% jump was possible? I doubt many did so. Likely most were busy with selling like there was no tomorrow anymore!😖 How about now? Are you selling or buying? I bet many are buying buying as it feels so comfortable that everyone else is buying. I'm not sure this is a good idea at all in chasing highs now as this may be a short term bull trap that may implode soon, if not already. This week we have seen a few attempts for the market to challenge the 2940 level. Believe or not, this is a rather strong overhead hurdle for the market to overcome as it is a multi-year resistance line. No wonder why each time of the challenging attempt, the market turned back. I will tell you one more reason why a V-shape recovery is less likely and we are not out of the woods yet. Stay tuned!

 

Negative interest in the US?

This is indeed a wild time period that anything can happen. The futures market in interest rate land did something yesterday I never thought I would see in the U.S.

It projected negative interest rates. In the USA! This is monumental as it will have a profound impact on all aspects of our life. 

Negative interest rates have been widely implemented in Europe and in Japan. It is a deflationary economy that is more difficult to contain and pull out than inflation. It usually means a deeply troubled economy!  

If the Fed were to introduce negative interest rates, commercial banks would be charged interest on their deposits. And, as the situation in Europe demonstrates, that negative interest would likely be passed on to consumers. This means savers would be charged interest by banks to hold their deposits, instead of earning interest. This is how money savers will be punished! On the other hand, those who borrow money can be beneficiaries as they may be paid by the lenders to take a loan. So get your Fico credit score fixed and improved and be ready to borrow as much money as you can when the negative interest rate era comes!! And yes, gold will go up to the moon when the US goes into the negative interest rates

Of course, The Fed (Powell) is on record many times over the last few years and especially of late saying that negative interest rates are not in the cards for the U.S.. Which one can you believe? To be honest, I think the bond futures market is much more credible and trustworthy than the Fed and sooner or later, what the bond market predicts often come true eventually. Ironically however, investors and traders in the markets always strongly react to what the Fed (Powell) says and will literally take the face value of anything coming out of Powell's mouth. You can bet Powell will strongly deny there is any chance to see a negative interest rate soon in the US. If so, then bonds may goes down and interest rates will go up.

Powell is scheduled to speak next Wed. Will he address the negative interest rate question? I'm pretty sure he will be asked! Let's see how he responds and how the market will react!!  

Either way it is bearish

Last night I noticed something interesting, which made me think that regardless how the market would be doing today, it would be bearish! It is the VIX chart that is sending some signal that a pop in the volatility is imminent, which is nearly always associated with a downdraft of the stock market. Here is the chart of the VIX after today's closing:

Last evening, I noticed that VIX was sitting right at its lower BB. Then there are only two scenarios to follow: either VIX jumps immediately or it goes down further to below its BB and then pops. Either way, it will send some panic wave to the market seemingly out of the blue. I believe I have talked about this before that VIX has rarely closed below its BB, probably once or twice a year. Whenever that happens, it will jumps higher very soon. There is no way to know how high it will go in advance but usually meaningful that will cause some pain for the stocks. See the green allows; the recent two times when VIX was close to its BB, it jumped and S&P plunged for over 100 points each time. This time, VIX has closed below BB today. To me the signal is very clear that the volatility is ready to rocket high probably in a few days at most. So fasten your seat belt as it won't be smooth!😗😵 

In addition, it seems to me that the current setup is quite similar to that about a year ago (see the pink circle) just before a huge quantum leap of VIX. Not necessarily immediately like next week but in the next few weeks, I think this is something likely coming. After all, we are in the "Go Away" period but I have started to sense the euphoric mood building up now. A perfect setup for a sudden and surprising volatility attack!

Considered being warned!!😷😎  

A guru's market wisdom

In the investment world, there are a few masters that I really adore such as Warren Buffett, Peter Lynch, Jim Rogers etc. One of them is probably not so much known but also one of the most followed investors on Wall Street. His memos to investors are widely read across the financial industry. It is Oaktree Capital's Howard Marks. He recently said something I think we should all be aware of... 

"The S&P 500 Is Taking the Economic Collapse a Little Too Well..."

While on CNBC recently, Marks discussed how he felt that there is a disconnect between stock market performance and the reality the world is facing amid the coronavirus outbreak.

We're only down 15% from the all-time high of February 19, but it seems to me the world is more than 15% screwed up.

It took seven years to get back to the 2000 highs in 2007... it took 5 1/2 years to get back to the 2007 highs in late 2012.

So is it really appropriate that, given all the bad news in the world today, we should get back to the highs in only three months? That seems inappropriately positive to me.

While I'm not convinced that this bear market will take years to overcome, I definitely don't believe that it is just a few weeks long. And I believe this week is likely marking the end of the this unbelievably strong bear market rally. Here is one of the reasons. The passing Thu was a special date for many traders, the end of Apr. For many traders, they use the 20 month MA as the trend line to differentiate a bull market from a bear. The Mar crash has pushed down the market to the bear within weeks, the fastest in history. And now the market has rebounded back over 60% of the loss and looking at the chart, you may notice that it is kissing its 20 month MA from below. You may recall I have talked about the "suicidal kiss" several times back in 2018 with quite accurate prediction for the market moves (here is one). Since we have entered into the bear market this time, it's worth comparing what had happened in the previous two bear markets, 2000/2001 and 2008/2009. As you can see below in the chart (the chart is a few days old but you should see the point), both had tried to bounce back to kiss its 20 MMA after the initial crash. The current 20 MMA on Apr was at about 2888ish and the market closed barely above the line yesterday on Apr 30. But it could not hold and declined below almost immediately and closed below it on Friday. If the history is any indicator, I think the market is done with this phase of rebound and is entering into the next phase of correction, potentially quite severe. I definitely won't be complacent with the seemingly strong recovery, which could just be a bull trap within this bear market. I could be wrong of course but I'm with Marks in questioning the validity of this rally so far. We should soon find out where the market is leading us to.

 

A New Manhattan Project

Heard about Manhattan Project? Hope you are not so ignorant in history but just in case, here is what about the famous Manhattan Project: 

The Manhattan Project was a research and development undertaking during World War II that produced the first nuclear weapons. It was led by the United States with the support of the United Kingdom and Canada. From 1942 to 1946, the project was under the direction of Major General Leslie Groves of the U.S. 

No need to say that the Manhattan Project has played a major role in ending the brutal WWII, which forced Japan to surrender after two atomic bombs were dropped in Japan. Now another major project to end the global war against the widespread COVID19 pandemic is ongoing. It has been nicknamed as Manhattan Project, to denote its importance. Here is the excerpt from the front page of a recent Wall Street Journal: The Secret Group of Scientists and Billionaires Pushing a Manhattan Project for COVID-19.

A dozen of America's top scientists and a collection of billionaires and industry titans say they have the answer to the coronavirus pandemic, and they found a backdoor to deliver their plan to the White House.

The eclectic group is led by a 33-year-old physician-turned-venture capitalist, Tom Cahill, who lives far from the public eye in a one-bedroom rental near Boston's Fenway Park. He owns just one suit, but he has enough lofty connections to influence government decisions in the war against COVID-19.

These scientists and their backers describe their work as a lockdown-era Manhattan Project, a nod to the World War II group of scientists who helped develop the atomic bomb. This time around, the scientists are marshaling brains and money to distill unorthodox ideas gleaned from around the globe.

They call themselves Scientists to Stop COVID-19, and they include chemical biologists, an immunobiologist, a neurobiologist, a chronobiologist, an oncologist, a gastroenterologist, an epidemiologist and a nuclear scientist. Of the scientists at the center of the project, biologist Michael Rosbash, a 2017 Nobel Prize winner, said, "There's no question that I'm the least qualified."

This group, whose work hasn't been previously reported, has acted as the go-between for pharmaceutical companies looking for a reputable link to Trump administration decision makers. They are working remotely as an ad hoc review board for the flood of research on the coronavirus, weeding out flawed studies before they reach policy makers.

The group has compiled a confidential 17-page report that calls for a number of unorthodox methods against the virus. One big idea is treating patients with powerful drugs previously used against Ebola, with far heftier dosages than have been tried in the past.

The Food and Drug Administration and the Department of Veterans Affairs have already implemented specific recommendations, such as slashing manufacturing regulations and requirements for specific coronavirus drugs.

National Institutes of Health Director Francis Collins told people this month that he agreed with most of the recommendations in the report, according to documents reviewed by the Wall Street Journal and people familiar with the matter. The report was delivered to cabinet members and Vice President Mike Pence, head of the administration's coronavirus task force.

This is really the beauty of the US with a system that attracts the top talents from all over the world to work here in all the fields. I have no doubt that US will likely be the leader again in developing the overall effective treatments to contain or even cure the terrible pandemic! We have just got the encouraging news from a large randomized trial for remdesivir that really excited the market. I'm sure this is just the beginning and more good news in the medical science frontier will come more in the days ahead.

Now a brief comment on the market status. The market had a fierce positive response to the news when it broke out, which pushed S&P over the 61.8% retracement level I talked about just a while ago. But as I told my friend when S&P hit 2940ish two days ago, the seemingly bullish move could just mark the final exhaustive buying and we probably have seen the top of this unbelievably strong relief rally. Dose the past two days of retreat prove I'm right? Not necessarily so as the market may still fight back to try to march higher from here. If so, however, I'll still advise for caution about the sustainability of this rally. Purely from the technical perspective, I'm not convinced that there is much more upside room from here but a lot more downside room to go, probably in an order of 1:5 scale! Similar to the time a few weeks ago when I was methodically buying on the way down for the long side, I'm now buying methodically for the short side (i.e. shorting) as the market persistently goes up. Sooner or later (probably a lot sooner) we will start to see the stagnation to the upside (similar to the late Feb) but sudden and powerful falling apart from the highs. Have a plan and trade the plan!!