Friday, 26 January 2018

Stock Market: The FOMO is Strong

The market has extended nearly 7% so far in January, and the month isn't even over yet. And not just in NYSE. If you look at the Shanghai Composite, it has gone up 8.14% since new year, outperforming SPX.

Shanghai Composite actually isn't as stretched as S&P500 because it has a healthy pullback of some 5% in November last year.

On a MONTHLY chart, the only other time RSI of SPX500 is this high (RSI = 87.5 as of 15 Jan) was in 1996 (RSI = 88) and 1997 (RSI = 88.7). These are indicated by arrows in chart.

Arrows indicate the high RSI in 1996 and 1997
Arrows indicate the high RSI in 1996 and 1997
(Click chart to enlarge)

In many ways, the current stock market is similar to 1995 and 1996, meaning i expect this market has a few more years to run. However, we can and should expect short term pull back, like, right now.

After the high RSI = 88 in 1996, the market corrected by about 10%. I don't expect this to happen this month as that 10% correction took place between May and July.

On a DAILY chart, we've had the same RSI = 85 that we reached last week on 1st March last year, and the market declined by 3% over 6 weeks. As i said the daily RSI reached last week while the prices keep going up, this implies bearish RSI divergence.

A 5% pull back from here seems reasonable and healthy. A reversion to the mean move towards 50D MA or around 2,700 doesn't do any technical damage and does the market a world of good. We never had a pull back of more than 3.5% last year. A 5% is overdue. I know, investors have been waiting for that for more than a year. Well, it will come eventually. Even a 3.5% drop right now can create some delicious bargains. The longer we go up, the larger the pull back is going to be.

Jaws poster
Are you the shark or the victim?

It's entirely possible that the market simply moves sideways for months, working off the stretched technical indicators as expensive/overbought sectors are being rotated into cheaper /oversold sectors. The price actions are like currents under the still water. It looks calm on the surface, but prices of individual stocks and sectors are churning underneath.

This has been the consistent theme throughout 2017, which explained its limited downside (still water).

Take the Transport index (IYT) as an example, it has a pull back of nearly 10% during March last year. But from November to January, it went up by 27%! But its pull back that took place in the last few days are just as violent. But on the surface of SPX, everything seems calm.

Yesterday, i observed a number of shares dropped 3% to 8% when SPX drifted down by 0.25%! And when SPX turned green again, these stock quickly recovered their prices (a few didn't). It's clear to me that many stocks WANT to reverse to its mean, they were yelling, "here comes the overdue correction, run!", but the market (of new FOMO investors) wouldn't let it. The market is lulling investors into a trap with soaring prices. So many stocks could easily drop 10% to 15% when SPX falls by 2 or 3% (and 20% to 30% when SPX falls by 5%). I expect more pull back from them to come.

Regardless of price correction or time correction, when market is stretched like right now, opportunities will be created by one of these 2 type of correction. When time correction is occurring, you have to dwell deeper into individual stocks to look for opportunities.

Price actions in the next 2 weeks should be interesting.

Darth Vader, "The FOMO" is strong

I started to accumulate cash from 20% last week until 70% today (i've never had less than 15% cash position). Boy (or should i say Luke) the FOMO is so strong. Mine and the rest of the market.

I keep telling myself, patience has its own reward. I hope so, the FOMO in my shoes are making me very very antsy. I also remind myself, trading up here makes no sense from a risk to reward ratio (as long term investors, you probably want to sit tight. But there will be bargains regardless when the pullback takes place).

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