Saturday, 3 February 2018

FOMO Buy Followed by Overdue Sell-Off

Patience does pay (even if it's only for 2 days in the weekend). I wrote the piece Stock Market: The FOMO is Strong (dated Friday 26 Jan after market close) just before the beginning of the long-awaited pullback on the following trading week.

I didn't expect the pullback started right away (although i said in that post, "...we can and should expect the pullback to start, like, right now"). I never expect the market would listen to me.

A retracement to the uptrend line (indicated by arrow) had occurred, which i didn't expect to occur for another day on Monday (5 Feb). I didn't expect the speed of the sell-off. This kissing of the trend line represents a 4.1% correction from ATH (indicated on chart as "1st major support"). Perfectly healthy, and causes zero damage to the medium term technical. Even a reverse to the 50D MA (blue line) is similarly healthy. This represents a 5.3% pullback. No sweat.

It's about time that we have a 5% retracement after a whole year without greater than a 3.5% correction in 2017.

Feb 2018 pullback showing support
(Click to enlarge)

This makes sense because in 2017, there were still many skeptical investors about this bull market, and so the markets only produce timid rallies that followed by mild pullbacks, quite unlike the exuberant rally we witnessed in January this year when investors are emboldened by the the Tax Cuts and a bumper year of 2017. The FOMO (Fear Of Missing Out) trade was on. "You would be crazy if you don't buy this market. It goes up everyday and never goes down!" was probably the mantra.

(Don't click)

Last year is an anomaly that occurs once in a decade (this occurred once in the 1960s, once in the 1990s, once in the 2000s. As i said, once a decade. So don't expect that again until the 2020 decade). Expect more 5% or higher % pullbacks this year to be the norm. A 7% to even 10+% isn't out of the question.

The VIX is closed up over 16 for the 1st time since 2016 Election Day. I expect increasingly higher VIX closes until the peak of this bull market. This means bigger dips.

Vix chart showing a close above 16 since 2016 Election Day
(Click to enlarge)

I expect this dip to be over by next week. As early as Monday (5 Feb) as it may open lower (to test the 50D MA) but turns around by the end of the day. Of course, it may open green, and go up all the way until market close. I expect Tuesday or Wednesday (7 Feb) to be the latest to end this dip.

As i mentioned in my previous post above that i've accumulated 70% cash in anticipation of this pullback. I've so far deployed 8% of my cash in some discounted stocks (i bought OLED on Friday). By the end of next week, i plan to have a 90% equity / 10% cash in my portfolio (unless things change from my expectation). I'll be patient in deploying my cash. In any case, the risk to reward ratio is so much better for this coming week(s) than last week. We can't predict (only speculate about its probability), it's all about risk to reward ratio. Buy dips, sell dramatic run-up rally. Because it's so simple, it's very very hard.

Deciding what to buy is so difficult with so many bargains (not gloating).  The drop in percentages in stocks are, in general, more than the decline in the indices. So it makes more sense to pick up stocks. Some of the stocks on my watch list includes: INTC, FCAU, GM, CAT, FDX, UNP, NTES, EA, PCLN, BB, SQ, WB, ISRG, PBR, HAL, etc (the last one isn't a stock).

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