This sector is not dead yet, at least....

“during this seasonal period!” This is how I want to finish the title sentence.

 What was the biggest news in the past week in the business circle? You may think of something else but I would say the filing of bankruptcy for Sears, the 125-year-old retailing giant whose revenue once totaled as much as 1% of America's GDP.  At its peak, Sears boasted 900 stores, 200,000 employees, and revenue of $31 billion. The Sears catalog was once known as the “Wish Book” or “Big Dream Book.”, sent to 20% of all the American population. It could run as long as 1,500 pages with more than 100,000 items for sale. In its bankruptcy filing, Sears valued itself at just $6.9 billion in assets with $11 billion in liabilities. In the past 5 years or so, it has been subjected to an ignominious, slow death, culminating in this bankruptcy. This is the second major bankruptcy by the American icons within 2 years; the other one was the famousToys R Us. But don’t count them as the only two. More, and a lot more will be coming in the years ahead due to humongous debt burdens on corporations in general and many of them will eventually blow up with increasing interests that will last for long and accelerate in the coming years. The next one may likely include Bed Bath & Beyond that I have also talked about before. I’m sure we will talk a lot more about this depressing trend in the next few years.

There are many reasons that are not conducive to the retailing business, especially those relying on brick and mortar retailers. But the most attributable culprit is definitely the surging online giant, Amazon! While the long term trend for this sector is by all means very depressing, don’t just be too bearish for the nearer term. It has definitely not yet dead, especially in this season. You see, we are coming into the year end for the most important shopping season, Christmas. In general, this is the best season for retailers all sizes and types. This year may be particularly strong due to a strong economy not seen in a decade as well as more income for general Americans (salary increases and/or tax reduction). So the vast majority of shoppers should feel pretty good and will likely spend more than usual in the couple of few months. In addition to this seasonally strong period, the last week 6% market crash has actually created a great buying opportunity. Retail is among the worst sectors during the crash and has dropped about 10% in the past two weeks. But again based on historical data, whenever such a drastic decline occurs for the retail sector, a substantial rebound will follow soon and I think this bounce may be even bigger this time due to the seasonal strength. If you believe what I’m saying, then buying XLY for this sector is an easy way to ride the trend. One caution though, as for the general market, we may see some extreme volatility again in the next couple of weeks. If so, XLY may also come down to retest its recent low as well. But it will be a great time to buy at its weakness.   

Time to run or jump in?

“Should I sell all my stocks now?” This is kind of question I have got from a few friends these days. It had been really universally pessimistic in the past two weeks till early this week. Based on the chatting groups’ messages, I get a sense that a lot of people feel very depressing about the stock market right now and many were even saying that we have reached a major top and this correction should mark the beginning of the end of the 10 years bull market. And of course we are heading to much lower lows in the months ahead. Of course they may be very well right but as a contrarian I have a different opinion. Yes, the market will reach its unavoidable top and  go much lower at some point but I don’t believe it is imminent in terms of months. On the contrary, I think we will see new highs many times and a lot more from the recent tops before we reach to its maximum for this bull run. Let me explain.

I hold the view that bull market does not just die of age. Indeed this gigantic bull run has lasted for 10 years now and we are for sure very close to its top than bottom. But for its final ultimate top, I personally use two main indicators to gauge. First is the sentiment euphoria.

If you don’t know this famous maxim, you must try to inscribe it onto your heart:

 "Bull markets are born on pessimism, grown on skepticism, mature on optimism and die on euphoria.”

“The time of maximum pessimism is the best time to buy and the time of maximum optimism is the best time to sell."

 

Sir John Templeton

No one has probably described how the life of a bull market better than the legendary investment icon Templeton! So typically a bull market ought to die when there is blow-off euphoria developed. We have seen two examples in the recent history. In late 90s everyone wanted to jump in to catch up with the unstoppable dot.com frenzy. I was not in the US yet but I got investment newsletters in Europe to advise me that Intel would go up to $500 soon. Basically anywhere you go, you would get some stock tips even from a taxi driver. Many just quit their job as they thought they could make enough for their life from the stock market. This is kind of euphoria typically seen at a major top! Similarly in the mid 2000s, we saw another huge euphoric sentiment developing and this time for the housing market. I believe in 2007 I saw ads floating around calling people to sign up for free housing hunting trip from New York to Florida. Yes, at zero cost such a trip! Typically this kind of extreme euphoria will lead to a Melt-up of the stock market during a short period of time when a FOMO is developing and everyone wants to jump in. We definitely haven’t seen this phenomenon yet!!

Then the yield curve inversion. I have talked about this in details and you can find it here if you still don’t know what it is all about. This is very reliable early warning signal for an upcoming bear market to come and usually warns us 6 months to 2 years ahead of time. Ideally and hopefully we will see the yield curve first, followed by a Melt-up phase with extreme euphoria later. That will probably sort of “confirmatory” signal that a recession will finally come. I think we are far from seeing it at the moment.

So what to do now? Where it always depends on your timeframe. In the very near term, i.e. a couple of weeks, don’t be fooled by a seemingly rather strong rebound and rush to jump in like what we saw on Tuesday. I think the chance is still very high that we may likely see another retesting of the recent low around 2720 and it could make you sick again if you are chasing highs for now. It is very important that low is kept but of course there is no guarantee that it will be. However, based on historical data I have seen, I think the chance is also very high that this low retesting will be kept with positive momentum created that will pave a way for a more solid year end rally. You may not know yet but this recent crash has caused an extreme oversold condition not even seen with the January crash: the sentiment indicator, RSI dropping below 30. Someone tested the past 3 decades data and found that there were only 6 times occurring previously with such a low RSI for S&P. Now this is interesting to note that each time, S&P jumped back significantly higher in the following 3 months with an average of 8% gain. If this time we follow the same path which I believe we will, we should comfortably see a new high by the year end. But as always there is no assurance whatsoever. Tomorrow I will share an idea what may be an ideal sector to ride for the coming year end rally. Stay tuned!

Next to a sure thing

We always say there is no sure thing in the investment world. It is true indeed but occasionally there will be something popping up that is virtually a sure thing, although still not necessarily 100% probability. I think we are witnessing such a trend that is almost a certainty to be happening now. I’m talking about the bear market for bonds.

Bond has just completed its unbelievably long lasting bull market since 1980s, yes, about 40 years ago! The 10 year Treasury rate reached its peak over 15% by late 80s (meaning bond prices were at the lowest point) and then started to move down almost like a straight line. Inversely bond has started to move up to enjoy a fantastic bull market for the past 4 decades. See the chart below that visualizes the beautiful one way trend in the past 4 decades!

 

The potential turning point started 5 years ago and actually I had noticed and pointed it out then (see here and here). Of course, for such a long persistent trend, you cannot expect it turn around to go to the other direction suddenly. More realistically, it needs some time to pause and struggle to determine where to go; it is called consolidation or bottoming. For the long term interest, it takes about 3 years (2016) to finally decide it wants to change its direction and move up. Here we are. The 10 year rate has already comfortably moved up beyond the 3% threshold. I think the bull trend for interest (bear trend for bond) has been firmly established.  Unless there is something extremely devastating for the world that has to push down the interest rate again, there is no turning back. Of course it will still fluctuate and may even drop back below 3% at some point, the overall trend should be up and up. The 4% rate may not be too far away from now. I bet it may come by end of next year. If the history is any indicator, this kind of bond/interest trend will be lasting very long, often in decades.

People often ask me what to do for their portfolio. Asset allocation is something I will be promoting for sure and I always say bond should be included as part of the portfolio. But here is the dilemma: when interest rate goes up, bond goes down. So buying long term bonds is suicidal and certainly not advisable. Yes, short term bonds can still be considered as I just talked about but they are more like cash positions with much less interest to earn. In addition I also offer the idea to use a good life insurance with guaranteed cash value growth as an alternative to bond investment for your portfolio (more here). And now I have got another idea, although unconventional for sure. Since the bond trend in either direction usually lasts for very long time and since it is next to a sure thing that the interest rate will go up persistently with bonds to go down along with in the years to come, why not simply have a portion of the portfolio to short long term bonds to ride the bond bearish trend? Although conventionally bond positions for a portfolio are always long betting for an uptrend, there is no rule to go against the convention by shorting the bonds when its gigantic trend is going down. I personally think this is a very safe bet to be included in the portfolio as long as you go with a comfortable position size. I personally will be very comfortable with a 5-10% of my long term portfolio to bet against the long term bonds!

I understand shorting is not something most people feel comfortable with and you may think it is technically very challenge to do so. Actually now with ETFs widely available, you can just make one click to short long term bonds. TBF is the ETF to short bonds for 20+ years maturity. You buy it just like buying a usual stock and that’s it. Since this is not a leveraged ETF, it’s much safer with less volatility for holding. Of course, it will still fluctuate along with the bond market inversely but I’m very confident its long term trend is going up and I can comfortably buy and leave it without much monitoring. I think this can be a good portfolio diversification portion that can serve a good buffer for potential large stock volatility. One last note, the last two weeks were unusually harsh for bonds as they have crashed by 5%, which is very rare for bonds. On the contrary, TBF has shot up a lot in return. I think it is very overdone and bonds will likely rebound to relieve the oversold condition and TBF will come down accordingly. So there is no rush to buy TBF as of now but buying it at weakness will be a wise move for me!   

The card of the God

As I said a few days ago, the daily chart of S&P still looks very bearish and is poised for further downdraft, but I honestly thought it would rebound first before its next leg down. Well, the Market God just wanted to prove I was wrong and didn’t really played card as I expected by bouncing first but instead mounted a free fall for 6 consecutive days, giving up 10% from its recent new high. Volatility nearly doubled to show how panicky the market was. Not sure if it is widely known, while October in average is the best month of a year, from time to time some worst days of market plunges also tend to occur in Oct. The most recent one is of course Oct 2008 in which Dow declined 14%, to kick start the Great Recession. Then a little bit earlier in 1987, the famous Black Monday crash knocked down the Dow by 23% in a single day, which is still the worst single-day percentage plunge in history. Much less remembered were 3 one day big gut-wrenching plummets in Oct 1029 called Black Thursday, Black Monday, and Black Tuesday. If we go further back, the NYSE witnessed a 50% plunge in Oct in 1907. Ouch!! So folks although it is not common, it could happen in Oct to see some serious crashes in the stock market. It could be worse than what we have just experienced.

But the good news is that I think the worst is probably over by now. The relentless panic selloff, while painful for those overtly long in the market, has made an extremely oversold condition even worse than Jan and is setting up a much better base for the market to launch the year-end rally. We probably will see new highs by the year end! But again, it won’t be a straight-line up from here. The initial rebound may feel like strong and powerful enough to just continue for the remaining 2 more months, there is a high chance we may see another retest of the recent low in order to build up a more sustainable momentum for the year-end rally. See the chart below for S&P to remind you what was the recovery course since the Jan plunge to its new highs. I have written a lot during the period to map out the likely pathway and given enough warnings for the low testing when there was strong rebound initially (you may still remember my Suicide Kiss call-check it out here for details). Don’t be surprised to see something similar in the next few weeks. So if you want to trade in the market, just keep this in mind.

No need to panic yet

The past 3 trading days were brutal for anyone bullish. I was expecting this kind of mini crash in Sep but the market God decided to postpone it. A lot of people became really excited and complacent as Sep was typically the worst month of the year that didn't do much harm at all. Why so worried at all moving into Oct which is typically a bullish month in general? As I said before, the market God is good at hoaxing people into something and then suddenly strikes without prior notice as it has the habit to punish most people the most. Here we go, in 3 days, S&P shed off roughly 60 points or 80 points in total from its recent high around 2940. While percentage-wise, it is really not too much a big deal, the volatility index, VIX, shot up almost 50% within days, suggesting there was sufficient panic involved. Technically it indeed has done a lot of damage to the S&P chart as it has dropped below its 50 DMA with its daily momentum clearly in the negative downtrend, suggesting it hasn't done its work yet for the downside risk. But for the very near term, meaning the next few days at least, the downside risk should be very limited. Actually I'd even argue for a sizable rebound maybe starting tomorrow. Could we see more weakness at opening tomorrow? Of course it is possible but I don't think it is sustainable. More likely we are going to see a good rebound for S&P jumping towards 2920ish. If I'm right that we do get there, that will be the point for another caution for the next leg down. That's the road map I'm expecting to play out, barring any significant headline risks that may totally change the path.


Stay turned and let's see how the market God will play with its cards! 

A brilliant Chess play

Two major trade deals with South Korea and Mexico/Canada in the past couple of weeks have been signed off! And more good news may be coming from the ongoing negotiations with Japan and EU in the near future. That’s something I have been expecting for months since the very first breakout of the potential trade war early this year! As I said, I never believe a real trade war would be materialized and all the major trading partners would find a way to compromise with the US for a new trade deal. Of course, you will quickly hear the naysayers to talk down the importance of such new deals as for them whatever Trump has achieved is either bad or nothing to the country. Just ignore such nonsense noises and see the big picture!  

Now the only major trading partner with the US that is still at a full stand-off is China. While I was indeed expecting a more speedy deal to come, it is becoming increasingly unlike that there will be a deal soon. The tactic for China is very clear now that they want to wait till the midterm election, hoping that Trump will be weakened after that to step back from his overwhelming pressure to push China for changes. I think China will likely be disappointed for that. For one, with the disgusting dirty play by the DEM’s side in trying to block the nomination of the Supreme Court Judge Kavanaugh, GOP may get more support believe or not in the mid-term election. The disgraceful saga engineered by the Left side will likely backfire for them that it will not only further strengthen the Right to vote but may very likely also motivate the undecided swing voters to go for GOP just as what they saw in 2006! But even if the result is not in favor of GOP, I think Trump has a much bigger strategy in mind in dealing with China and that’s why he said he has in no rush to talk to China for a deal. I start to see his brilliant idea unfolding. You see, all the major trading partners with China all feel the same regarding China’s unfair trading practices in terms of government-subsidized business and forced transfer of technology and IP. But all of them, including all the previous US presidents, can only get angry but dare not to speak out as China is too big to fight against. Until Trump! He is not a politician and is not controlled by any parties with vested interests. And he is the only US president who dares to challenge the status quo and so-called political correctness, including the trade conflicts he has initiated. I was also wondering why he would open all the fronts in fighting with all the major partners at the same time, not just China where he could gain more support from all sides. I suddenly realize now how smart and visionary Trump is. He is playing a gigantic Chess actually. His main target is still China and he wants to see some fundamental changes from China, a major legacy of his that may have long lasting historical impact not only for the US but also for the modern international trade! After disrupting and reestablishing the new trading order with all the major partners, he has managed to have them all reunited with the US with one unified and powerful voice, demanding China to change in the unfair trading practices. That’s his real ultimate goal and he is gaining more and more momentum toward this goal. I’m afraid China will have no choice but comprise in some significant way in the months ahead!

Actually the market has already told us loud and clear that China is fighting in a losing game as its stock market has lost over 20% in the past few months while the US market has reached new highs at the same time. But I think it will change as part of the Trump’s Chess play. China will be forced to give in one way or the other and the market will be relieved by avoiding a major trade war at the end! So as a contrarian, I see more opportunities from the sluggish Chinese and emerging markets. And one sector I particularly like is the emerging market e-commerce business. This is one of the megatrends for the future and more so for emerging markets. You see, they have the demographics advantage with much younger populations and their demands for Internet is still booming. The iPhone or smart phone penetration is still having a long way to go, meaning there is much bigger room to grow for their e-commerce. You can easily bet for this trend with one click for the EM e-commerce ETF, EMQQ. It holds top companies from China and other major EM countries that are doing similar e-businesses equivalent to Amazon, Google, FB, Twitter, Expedia or Uber. Just name a few: Alibaba, Baidu, Tencent, 58.com, Yandex, Naver, and MercadoLibre.  The trade war fear has knocked down EMQQ by about 20% for this year but I think this is great opportunity to grasp a few shares for the long-term. Believe me, if China finally “surrenders” to make a deal with US as I expect they will, you can quickly see a rebound in the EM markets, including EMQQ. Of course, as always, it is associated with risk sand trade with caution with the money you can lose.  

By the way, I may sound like against China. Not a bit actually! Just be a bit visionary and understand that for China to continue grow and progress healthily for long term, it has to change its trading practices in the international community to play by the rules. Otherwise, it will run into more and more serious confrontations sooner or later, which is fundamentally bad for China as a whole. Actually I got this kind of impression as well when I was in China lately that the Chinese business circle also wants to see this kind of changes that should be long term positive for China's future!  ✌✌       

Touching a glimpse of glory

First just a few words about the market. I must say the Market God has really impressed me lately as there seemed no fear whatsoever regardless what was happening in the world. I'm especially impressed by how the market is reacting to the fast moving up of the long term interest rate with the 10 year rate just jumping to 3.2% within a couple of weeks from around 2.9%. Back in Jan this year, I have already said "it is almost a certainty that we will see 3% this year. " (see here) and I recommended to buy TBT/TBF to ride the trend. If you do so, you should be really happy! Although the market has basically ignored the rate increase thus far, be aware this long term rate increase will be very detrimental to the stock market at some point, especially when it shoots up to 4% and above. Certainly not any time soon to see a 4% rate yet but we may see it by end of next year. I guess the market is ignoring the increasing interest so far probably just because of that we are still a little far away from 4%, so why worry about it. But it will be wise to keep this in mind and we may start to see more volatility down the road if the interest rate keeps going up. Today's market plummet is just a small rehearsal! Now back to today's topic.

It is a historical date on Monday (Oct 1, 2018) that The Nobel Prize in physiology or medicine was awarded to cancer researchers James P. Allison (for CTLA-4) and Tasuku Honjo (for PD-1), whose studies led to the development of drugs that unleash the human immune system against the deadly disease. Given the revolutionary nature of their work that has opened a new era to have fundamentally changed the way in fighting cancer, these two scientists truly deserve what they have got. Just think about how many lives have been saved due to their historical research work!

In some way, I’m also touching a tiny bit of glimpse of glory (沾光) from them. While I have never been a research scientist in my life, I have been very interested in immunology actually and have been involved in some work in this field in my earlier days of career. Retrospectively, I must say I did have some vision to foresee a day when cancer may be treated with immunotherapy. Here is one of my published papers in 90s: Lin R., Tarr P.E., Jones T.C. Considerations regarding the use of cytokines in active specific immunotherapy of cancer. Vaccine Research 1996, when nobody was interested in immunotherapy for cancer! More significantly, I was even heavily involved and participated in the pioneering work that led to the first ever approval of the immunotherapy for cancer, ipilimumab or Yervoy. Allison's research led him to figure out how to block a protein on the T cells (CTLA-4), so that they could go after cancer. Research led to the creation of ipilipumab or Yervoy which was initially started to be developed by Medarex, a company eventually acquired by BMS. Yervoy was approved in 2011 that kick started a renaissance for immunotherapies. As such, Allison's often dubbed the "godfather of cancer immunotherapy."

I can proudly say I was one of the critical team members in developing this revolutionary and historical therapy! With that, I can brag to my grandkids that their grandpa has something connected to the Nobel Prize!😇😆