Wednesday, January 6, 2016

Waterfall Decline Probable

You get waterfall declines when investors are bearish, not when they are bullish.  I rarely call for big declines because they are hard to predict.  But the setup with so many dips over the last few weeks, showing equity weakness, with the market making lower lows now in a seasonally bullish part of the year and still not seeing the big fund outflows is bearish.  The inflows into the oil ETFs have been ridiculously high considering it goes down almost every day.

The buy the dip trade worked so well last year except for one period (August-September), that it is an enticing trade to put on because they have resulted in quick V bottoms with near painless profits for those that bought after a few day selloff.

A strong market doesn't give you so many dips to buy in such a short time period.  The dip earlier this week seems like a trap to suck in dip buyers who think its just like the dip we had in November, or the two dips we had in December, which resulted in V bottoms erasing most of the losses.  I expect a bigger swoon lower this time.  I don't have enough conviction on that idea to go short, but it does keep me away from going long trying to pick a bottom here.

Treasuries will be the trade this year and it is unfortunate that I couldn't get a good long entry before nonfarm payrolls this Friday.  All signs point to a slowing economy both internationally and in the US.  Dips can only be bought now after extreme oversold levels.  We are not even close yet.  Keep the powder dry so you can take full advantage of any blood in the Streets in the coming days and weeks.  We should bottom in about 9-10 trading days.


Anonymous said...

Thanks for the on-going hand-holding. Much appreciated. So you are suggesting keeping the powder dry for treasuries? Curious what ETFs do you like in this space?

Market Owl said...

No, I am saying that we will eventually bottom in this nasty down move, probably much lower than current levels, in about 1 or 2 weeks. Then you want to buy stocks then for a move higher off the bottom.

After that rally, which should last several weeks, you will likely get a selloff in Treasuries at that time and you want to buy Treasuries then. After buying Treasuries, just take a really long vacation and just hold the position.

Market Owl said...

I don't trade Treasury ETFs, I trade the Treasury futures, which are ZN (10 year note) and ZB (20 year bond). If you want to get long Treasury ETFs, TLT or short TBT which is leveraged 2 x short TLT.

Anonymous said...

Many thanks for these insights.