Bearish now?

Surprised for the big two days selloff? If you took my words seriously, you should not. As I said yesterday before opening, the market was looking for an excuse to sell and it seems it has finally got the excuse whatever it may be.  Actually 2% selloff really is nothing for the market that has been up double digits within a few weeks but it may feels quite painful when people are so used to only up days without any meaningful down days, especially for those who are chasing highs in the euphoric mood. Friends are asking me if I'm bearish for stocks now. No, I'm not and actually I think this bull market has a good leg up in the months ahead. But that's a long term view. In the very near term, I do think the market has gone too much ahead of itself and is doing the best it can to fool the herd into believing that it will never go down big time. Whenever I see some folks telling people to just buy and buy almost anything, I know some painful selling is coming. That's why I sent out my warning early Monday morning. So now what?


Although we may see more painful days ahead in the next few weeks, the market hardly goes down straight line and you can bet the bulls will try every down day to step in, especially at the technical support level. After a 50 points decline in 2 days, S&P is right at about its 9 DMA, a short-term support. I think this is a very tempting support for bulls to come in for a "dead cat bounce".  The odds is much stronger for a solid rally in the next few days and S&P may likely go all the way up towards its recent high around 2870. If that happens, it will create a technical bearish double top with negative momentum. At that point, we may start to see an even more painful short-term crash to get the bulls some panic. With this consideration in mind, I have taken off my days-old shorting profits and actually more aggressively I opened some long positions betting that we will see some decent market rally at least for a few days. Let's see how this will play out.

Certainty of uncertainties

Can you understand what I mean? Sounds very confusing, isn’t! Actually this is very simple fact especially important for investing: no one knows for sure what will happen for any given stock, regardless how much research one has done. It is a certainty that there are always uncertainties out there in dealing with stocks.  Got it?! I guess no one will probably argue with me on this statement but in reality, not necessarily many people will count this much in their investing and trading. People tend to believe what they are convinced about and don’t want to easily change their mind even if the uncertain/unknown fact may have proven that their belief may not be so right. I’m talking about the exist strategy for trading.  As a general rule that I’m trying to follow (not really easy to strictly stick to it honestly), for each position I entered, I should have a clear mind predefined when I want to exist from it, since I know I may be wrong about the stock even if I have done great research and totally convinced about it. For stocks that I have bought for trading, I use a stop loss (e.g. 5% below the top or below my entry) to determine when I need to get out as the worst case scenario.  For options, I usually use spread to hedge my positions which will predetermine my potential loss already.

 

You may ask why I suddenly want to talk about the uncertainty in the stock market.  Well, I think there is a very relevant  real life example about the GE stock I recently talked about.  As you know back to end of Dec last year, I had a bullish call for GE, thinkingthat its bottom was likely reached around $17 and was poised for a big move up. I had done my home work with quite a conviction that I was right. As such, I opened three types of trade on GE. Since then, GE has gone through a roller coaster journey in the past few weeks with some quite surprising negative news that has proven how uncertainty we could run into. I thought it may be a good idea to share how I’m handling my trades with GE.

• I bought short-term calls for GE, aiming for a quick win if GE moved up soon as expected. Lucky me as GE indeed did exactly as expected in the following 2 weeks.  My calls jumped very fast and I ended up with an almost 200% gain within a couple of weeks.  So my short term call was correct without any surprise.
• Per my research, I thought GE has reached its ultimate bottom and could be starting a long term uptrend and I like its dividend as a value investment. So I also opened a stock position with an intention for holding it long term with dividend reinvestment.  This one has caught up with really unexpected bad news! GE surprisingly announced a week ago about a massive loss in its legacy insurance business that was a shock to the market and its stock of course got sold off en mass immediately.  Then their CEO talked about a potential breakup, for which it was too early to judge whether it could be beneficial to the shareholders.  For long term value investment, the last thing I’d like to see is the apparent uncertainty and I decided to get out for now. Thanks to its initial run-up, I got out with a tiny gain from this stock position.
• Then I have another intermediate term play for GE with put selling (using a spread to minimize the downside risk). This is low risk trade as all I’m betting is that GE won’t decline below $17 by Mar 16. Since my potential loss was predefined, I decided to hold this on after its initial surprise with the insurance loss. Actually I was thinking GE could be reacting well to its earnings a few days later due to how pessimistic the market was for it. I was half right as GE indeed responded quite well with a 6% jump immediately following its earning and then another bombshell was dropped: GE announced that it is facing a SEC investigation into its accounting practices and may need to re-report its 2016/17 earnings.

It is just like an unbelievable drama unfolded with my GE trades! Are there other uncertainties with GE? I really don’t know but I hope that’s it. With so much bad news for GE, I must say its technicals are not really too bad. I think there is a good chance this plunge is indeed its last shore drop and it may find its final bottom around the $15-16 level.  Even though my put selling position is showing some loss at the moment, I’m still holding it as I know how much downside risk it has, especially my profitable call trade can very well cover my potential loss if it turns out to be so. But again, for anyone else still holding GE, it is important to make up your own mind how to handle the risk. Holding it for long term may turn out to be a good call but there is certainly no guarantee, especially with potential uncertainties still possible for this 100+ year old American icon!

Popularity is never a good thing

I have started to turned bearish for US$ since early 2017 (you can see here and here). But a dollar downtrend is not a straight line and it will try to do a dead cat bounce from time to time. We got such a rebound last September as I suggested. Turned out to be a spot on call. After a month or so, US$ started its next leg down again and here we are, it has reached its 3 years’ low below $90 of the dollar index. Is it done for the dollar’s downtrend? I don’t think so but here is the thing, it is never a good idea to go with popularity in trading. After a waterfall type of down drafting in the past 2 months, it has become a very popular idea to short US$. This has been especially intensified by Treasury Secretary Steven Mnuchin’s comment that a weak US$ could be good for the US. Even though rarely any governments would openly talk down their own currency, in reality, almost everyone government is doing what they can to debase their currency as a weak currency is definitely good for their exports. Regardless you believe Mnuchin or not, the long term trend for US$ will continue to be down. But at the moment, the public sentiment is too bearish and shorting US$ has become a very popular trade. In the trading world, popularity is hardly a great thing and it often leads to a turning point short- or long-term. I think we are at this turning point now for US$ although it will be another short-term dead cat bounce!

 Here is what I'm thinking: US$ index will likely move up towards its resistance around $91 in the following weeks ahead! If you are shorting US$, better take your profit off the table now before everyone else wants to exit!!

Can this be another buyout target?

Over 4 months ago, Intercept Pharma (ICPT) got decimated by half from its peak of over $120 to about $60 due to safety concerns with its leading drug, Ocaliva. At that time, while it was quite tempting to jump in, I thought it was too early to do so. Here was what I said then: In short, it is still too early to tell whether ICPT has already priced in all the potential risks. It is not a good idea to catch the falling knife even though it could turn out to be a good entry point. Better to let the dust settle before jumping in. My primary concern was about the scope of the safety concern as there was a chance that the FDA could mandate a very strict REMS in place to limit the use of Ocaliva, if the fatality concern was considered severe enough. Well, ICPT didn’t bottom at $60 but continued to draft lower towards low $50s in the following months. However, I think the worst for ICPT is probably over. Let me explain.


 For one, the safety crisis appears to have been addressed successfully with the FDA and no restrictive REMS is needed. That’s a big relief for the company. Its technical pattern in both the daily and weekly charting is also suggesting a bottom is in for ICPT. That’s why I told my friends that low $50s was attractive last week. Luckily almost immediately after I went in, ICPT started to move up and now over $60 as I’m writing. But the biggest question for ICPT is if its phase 3 studies (one ongoing and the other to be initiated this quarter) on nonalcoholic steatohepatitis (NASH) can confirm its dazzling phase 2 results. While there is no guarantee how the phase 3 studies will turn out, we can make a calculated guess based on the phase 2 study. Actually the result was quite promising. In that trial, the NAFLD Activity Score improved by at least two points with no worsening in fibrosis for 46% of Ocaliva patients compared to only 21% treated with the placebo. Similarly, 35% of Ocaliva patients demonstrated an improvement in fibrosis, along with 22% that had NASH resolution. Comparatively, 19% of the placebo group demonstrated fibrosis improvement, and just 13% had NASH resolution. The safety profile for Ocaliva was also very comparable to the placebo arm. If the phase 3 result can replicate the phase 2 result, ICPT will be on fire and a double or even triple is not out of question. Since NASH is a huge market with no approved drug yet, I will even think ICPT may very well be the next acquisition target if some big boy with deep pocket can take the risk and wants to secure their NASH leading position. The opportunity is much better at the moment when ICPT is very depressed but the cost will be much higher if and after ICPT indeed gets great result from the phase 3 studies. Who knows maybe a deal is brewing now for ICPT. I’m long ICPT at this level for sure! Of course, trading for biotech is always very risky as there is no guarantee. So don't bet the farm!

What the smart money is telling us now

I have been bearish for the past 2 years for crude oil but we may have finally seen the true bottoming for oil this time. There are a few macro catalysts that serve good tailwind for oil moving forward:

• After a few years of brutal correction for oil, many oil companies could not survive or have to reduce oil production due to lower prices. That has helped cut down the overall supplies of crude oil.
• OPAC has finally given in to cut their share of oil production more seriously.
• More importantly, after years of aggressive QE all over the world to stimulate the economy, at least in the near future the worldwide economy appears to be recovering. The Trump’s tax cut law is very pro-business that could trigger a faster economic growth in the US. This is obviously very positive for the oil demand.

For me,  when the fact changes, I change my mind accordingly. I think oil is entering an uptrend that may last. For how long, I don’t know as it all depends on the underlying supply demand equation but I believe at least for a year or two.  The market is apparently thinking so as well as oil has been broken out the strong 3 year resistance level around $58 and maintained above it for a few weeks now. The question is whether it is safe to jump in now to ride the trend?  Well the smart money is telling us: not too fast!

 

As I have talked a few times before about the smart vs dump money via the COT report, those traders from the commercial end are the ones really knowing the fundamentals and they are the smart money that often provide a good signal when a trend may be changing in the near term. Conversely the dump money refers to those speculative traders who are typically chasing the prices and often a good contrarian indicator when their sentiment reaches the extremes. Right now, the smart money is extremely bearish with a record high of shot bets for oil while the dump money is extremely bullish for oil with historical high of long bets. When these two go to the extreme pole in the opposite direction, you better go with the smart money. I think there is a good chance the oil will come down first before its next leg up. Technically, the most likelihood first stop will be the support level around $58 and if the correction is more severe, it could go down as far as to its 200 DMA around $52. If you are thinking to jump into the energy sector now, think twice and better wait!

A laughable crypto that is doomed to go down to the toilet

 You may recall that I told you that bitcoin has become a life saving vehicle in Venezuela when its economy has collapsed and its fiat money is evenworse than the toilet paper. Now their President Nicolas Maduro has got a wild idea to cope with the disaster of its economy under his watch by  announcing  two weeks ago the launch of their blockchain cryptocurrency called “petro” which is backed by oil reserves. I must applaud for Maduro for his “vision” and nerve to get into the crypto world when most of the other governments are scared to death and don’t know what to do for the fast invasion of this burgeoning new technology into our life.  But I must say this Venezuelan government “Petro” crypto is doomed to go into the toilet very soon.  On a small scale, who dare to trust this socialist president and government that has turned the once among richest countries in Latin America into one of the poorest by “robbing from the rich to give to the poor”? There is no such thing as free lunch by simply redistributing wealth without personal responsibility and efforts and expecting the whole society will survive long with prosperity. Petro will just be another toy for Maduro to play with, hoping to continue and prolong his extreme idealism.  It will fail miserably as well with certainty before long!!

On a big scale, what’s the fundamental difference between a cryptocurrency represented by bitcoin vs the fiat money? It is not physical paper money vs digital money or even the technology behind the currency. The fundamental difference is the trust on the centralized fiat currency that can be manipulated by government and can be created out of thin air and debased without controlled vs decentralized currency that cannot be manipulated and created willingly just by someone. Just think about how much purchasing power your money (any fiat money you may hold) can maintain over time. US dollar, the world reserved currency has lost 99% of its purchasing power in the past century but no other currency is better off in reality. It has become a worldwide epidemic that every government in the world is freely printing their own money without any control. It is just a matter of time that the fiat money experiment will bring unprecedented financial disaster eventually if we simply let it continue as it is. The blockchain (BC) based bitcoin or something in the same nature is the first hope we are seeing now that may save the world in this sense! But don’t get it wrong that anything based on BC is created equally. Actually we have started to hear a few governments like Singapore, Canada and Sweden that are thinking to create their government-backed BC-based cryptocurrency. The question is what’s the difference between the current fiat paper money vs such crypto in terms of centralization and expansion control? Not a bit! The government can create and expand their fiat crypto reserve at their wish at any time without any control, just like what they are doing for the fiat paper money. The purchasing power of such fiat crypto will go down to the toilet in the same fashion for sure. So don’t get excited and believe that the government issued fiat crypto will be safer and more valuable. They will be inflated to nothing eventually as well! It is just a matter of time!!

JUNO could be the next MA target?

This was topic that I was thinking about a week ago when I saw a report that GSK had openly announced that they were looking into making a deal in the oncology cell therapy area. I thought Juno should be one of the best candidates for GSK. But I was apparently too late to make the call as I didn't write the blog right away, thinking this was not imminent. Well, it was reported yesterday that Celgene is negotiating with Juno to buy it now. While such rumors often prove to be true, it is still too early to be sure. Even the true negotiation may also fall apart due to various reasons. So be prepared to jump in if the Celgene/Juno deal does not go through and Juno plummets due to the failed MA discussion. If that happens, GSK or some other big boys may be the next bidder to come in. Sooner or later, Juno will likely be bought out.  See here why I'm very positive for Juno.