Views on the Market

(Source: dshort.com - click to enlarge)

Well I guess it’s confession time. For the first time this year, I am rather confused on where the market seems to be heading. I have not been 100% correct this year but have been rather accurate and done well navigating through the waters. However, the events of the past two weeks have shocked me and the indices have corrected about 6%. I really believed we had a chance to break 1,000 this month because of funds being underowned; however, with this selloff their 0% quarter or YTD gains look fairly good since the DOW and the S&P are now negative for the year. Honestly, I am very confused about this market and have given back some big gains, which disappoints me greatly; however, I have had a great year and believe this sell-off has created value. However, just because a stock is cheap, doesn’t mean it can’t get cheaper, as we discovered this year. I will give you my view for the market and lay it out in three scenarios:

1. Correction – I don’t believe we will retest the 666 on the S&P from the March lows due to the Fed’s actions and stimulus in plan; however, the consumer is in the process of deleveraging and unemployment remains weak. If you see this historical bear market chart, our current market movement is the blue line. I believe that our next correction will be about 6-8% more in this case and it seems like it is perfectly lining up with the 1973 Oil Crisis chart, highlighted in red. That would take us to about 825 on the S&P. I would say this is about a 30% chance and if it does and you have high cash levels, you will easily make your year and probably double your money within a month, when we rebound (and I still believe we will see 1050+ on the S&P this year).

2. Sideways Correction- The problem with a sideways correction is that it is a sawtooth pattern that trades as a range. Our range seems to be 875-925 and peaked at 950. The problem is that many long investors will get impatient and if they all sell at once, the market will tank. However, we seem to buy on the low end of the channel, so if this is the sideways correction, we should float to 875 and then go back to 925 and trade within in that range, until support is broken at 875 or resistance is broken at 925, 950. This could be a monthly thing, since a lot of money managers who made their year, have taken the summer off, hence “summer volume”. I would say this is a 40-50% chance.

3. Elevator Up Bull – This is when we just squeeze the shorts out of their position and rocket higher within the next month or two. Many believe this is possible as bearish sentiment is back in the market, and many funds will be building net short positions and holding cash and not longs. This could create a epic squeeze, since there is nearly $8 trillion of cash on the sidelines, that is tired of earning 0.5% interest. I would say this is a 20-30% chance, the lowest of the three.

All in all, this market is very difficult to navigate and I have been buying stocks that I believe are cheap and know. However, just because the stocks are cheap, doesn’t mean the stocks can’t get cheaper. I have a bunch of stocks that I have uncertainty about, so if I continue to remain uneasy, I will sell 40% of my holdings, at a gain or a loss, just to reduce my exposure, in case scenario #1 hits. I covered all of my shorts yesterday, which may have been stupid but ultimately, my gut told me to. I might get back in but this market just seems like it wants to trick people. Two weeks ago, everyone was loading up on stocks and now, everyone wants to short stocks! That last thing you want to do is load up on FAZ and lost 30% in a day because it can happen easily. Frankly, there hasn’t been this “ah ha” moment that makes me want to go all-in short, especially now that every idiot rookie is buying inverse etfs. I tend to have a feel of when to do that, and now just doesn’t seem right.