Post Dump Game Plan

The spectrum of greed to fear determines the urge to trade.  In the middle, and you get the least volatility.  In the greed extreme (GME/AMC/bitcoin madness in Jan, May 2021), you get a lot of movement.  People try to catch the big moves and hit the lottery.  But in the fear extreme, you get the most movement.  Nothing encourages people to trade more than when their future is on the line.  When you are losing tons of money, and keep losing money, jeopardizing your future financial plans, the fear percolates quickly until its no longer bearable and you push the sell button.  We've reached at least that urgent sell moment on Monday.  

We have made a full move from the extremes of retail investor greed in January/February 2021 to the extremes of retail investor fear in January 2022.  

The market works in cycles.  This is about as close of a replay of the 1999/2000 bubble that I have seen over the past 22 years.  It took over 20 years for a new generation of investors (suckers?) to catch the greed virus and start buying junk at ridiculous valuations because it was going up.  In 2000, it was mostly the baby boomers.  In 2021, it was mostly the millenials.  And if I had to compare, the millenials have been much worse at choosing their targets.  The internet stocks in 2000 at least had a vision, some basis for future growth potential, although outrageously overvalued.  The meme stocks and cryptocurrencies in 2021 look like a bunch of investors just piling into anything that was the flavor of the month, with total disregard for fundamentals.  

So we stand in front of a heaping pile of burning dung.  I've been burned by the dung over the past several days.  Being a countertrend trader, you will take hits when you get extreme moves.  Its happened before (January 2008, August 2011, August 2015, February/April 2018, October 2018), and it will happen again.  But there will be chances to make it back with interest over the next couple of months.  Under these conditions, there are enormous opportunities as you are deep into the fear cycle.  When in the fear cycle, investors make mistakes.  From others' mistakes, comes opportunity.  Here is the game plan for the next 2 months:

 1. Do not get net short, only short to hedge long term holdings.  Its just not worth risking being caught in a August 2007/October 2014/March 2020 scenario where after the panic bottom, you just get a steady grind higher, with no retest, that gives shorts no graceful exit.  

2. Buy dips towards SPX 4300-4350.  Stay long, slowly lighten up as we get towards the upper end of the range, SPX 4480-4560 (to be determined over the next few days, as we define the new range in this fear based market).  

3. Expect a retest, but don't bet on it.  In most of these sharp correction scenarios, after the first panic bottom, you get a successful retest of that bottom 1 to 2 months later.  It doesn't always happen, but it happens more often than not.  If you get that retest, that's a golden opportunity to load up not only on stocks, but also calls, as the up move off a retest is especially steady and steep and relentless. 

4. Don't let the fundamental bearishness seep into your psyche.  Yes, in the end, it probably turns bad, with inflation, Fed, and slowing economy with no fiscal stimulus, but we're trading the next 2 months, not the next 2 years.  

5. Short the VIX.  Even if the market doesn't go up, if we stay in a range and go sideways, the VIX naturally calms down.  Even in a retest scenario, the VIX usually makes a lower high.  Riskier than buying the dip, so can't be too aggressive with sizing, but higher probability trade. 

All signs point to Monday being the fear panic bottom of the move.  Yesterday they tried to repeat a squeeze into the close on Monday but the overnight gap down (Ukraine?) fears brought back the sellers in the final hour.  We are in deep negative gamma environment (usually bullish) and recent dark pool activity (DIX = 47%) shows that smart money were actively buying yesterday.  Explosive put volume on Friday and Monday, so lots of hedging going on, ahead of this FOMC meeting.  Just with VIX going down, you will have dealers who have to buy futures to adjust their hedges against short puts in their inventory.  

Still long, looking for an exit around 4460-4480.  Could definitely go higher, but want to have dry powder just in case there is another rug pull lower towards 4300-4350 in the next few days.