The vast underperformance of Nasdaq and small cap stocks is a warning sign that this 5 year rally is nearing its final legs. This market reminds me a lot of 2000, when the Nasdaq topped before the S&P did, and continued to underperform until the market bottomed the next year. Now I don't expect similar Nasdaq underperformance, but it is a sign that fewer stocks are acting strong now. That is what happened in 2007 also.
Honestly, the only regular short sellers left are the permabears. Most traders have learned their lesson through many losses, and gave up on shorting the S&P.
It is very unlikely that we are going to have a 10% correction, or even a 7% correction anytime soon. This market should chop sideways with a downward bias for the rest of this month. I can see this market trading between 1825 to 1875 during this time. After the month is over, I will study the price action and investor sentiment, which will give me a clue as to whether we start May with a new downtrend that takes us to 1740, or make a run higher to new all time highs towards 1920.
So for the rest of April, I will be an opportunistic buyer of Treasuries and shorter of S&P. For some reason, the emerging markets have been quite resistant to selling off today, so I will stay away from trading them in the near term.
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2 comments:
Hi MO, what are the chances of equities dropping 20% over a few days like 1987?
Thx.
It is possible that you get a 1987 style crash, but much more probable that you get a 2001, 2002, 2008, 2010, or 2011 style crash. Where the market goes down 15 or 20 percent, but spread out over 4 or 5 consecutive days, instead of just one day.
This market is ripe for one of those type of crashes. The only catalyst I can see on the horizon is a China financial panic. War will not do it, unless you get nuclear bombs dropped.
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