Bear's Warning Shot

The selling is getting serious.  Damage has been done.  Technically and psychologically.  There will be aftershocks even after we hit the bottom and are back in an uptrend.  Its not your 2021 market anymore.  I was a bit too sanguine, and thought the dip buyers would come in as usual, like your regularly schedule sitcom.  I was playing the percentages, expecting the same regime with dips being great buying opportunities and immediate rallies off the bottom.  

This is when traders like me get caught with their hand in the cookie jar.  You keep stealing cookies from that jar, but eventually you'll get caught.  Its a matter of how much you lose when you do.  Do you lose a finger?  A hand?  An arm?  An arm and a leg?  Now its just minimizing the damage and adjusting to the new regime, one that is less forgiving for longs.

Totally mistimed the long entry this week, with expectation that the 4550 level, and especially 4500 below that, would be strong support levels that dip buyers would rush in to buy.  That didn't happen.  The selling was stronger than I expected so early in the topping phase, although it is not completely out of the norm, as you saw similar types of severe selling in April 2000 and February-April 2018, right after a strong uptrend.  

This sharp selling over the past 3 weeks provides a lot of information on how the year is likely to play out.  The bearish sentiment that has been building up and hitting multi year highs in investor surveys, like AAII, is actually not a good sign for a quick rebound.  Usually, you get better rebounds when the bearish levels dip, but don't crater.  When you get investor psychology this bad, usually it takes time for the market to heal, and work its way back up to pre-selloff levels.  The newly bearish underwater investors will look to sell rallies more aggressively than in the past, making a V bounce less likely.  The view here is that once we make a bottom, there will be a choppy rebound, 3 steps up, 2 steps down, sort of uptrend from the bottom.  So not a good time to buy call options.   

And from what I've seen so far (dispersion is still persistent, correlation hasn't gone up), it looks too risky to play for a big up move right now.  I'm changing my approach to this market.  No more playing for a V bounce.  Perhaps we get a bounce up to 4500-4540 on anticipation of a less hawkish Fed, but I expect Powell to disappoint.  A lot of investors are still not buying into the new hawkish Powell, but he's got 4 more years secured.  Plus Biden seems more worried about fighting inflation than boosting the stock market.  And Powell is as slick a politician as they come, and he is willing to talk tough, even if it hurts the stock market, just to build up some cred towards politicians who are worried about inflation.  

With the sharp selling in recent weeks, especially focused on the stocks that went up the most in the past 2 years, it increases my conviction that the clock on the time bomb has officially started.  If we compare January 2022 to April 2000 (bear market downtrend started in September 2000), then you have another 5 months of choppy to up markets from here, perhaps making another trip towards 4800 or even to new all time highs.  If we compare January 2022 to April 2018, then you have another 6 months of a choppy uptrending market, making new all time highs right before you enter a waterfall declines.  So if history repeats, and my comparisons are accurate, you can expect another major top around summer time and a waterfall decline to start immediately afterwards.

2022

2018

2000

Looking to get out on underwater positions on a bounce towards 4500-4520 level, hopefully before the FOMC meeting, in order to free up capital to be able to buy if there is another move lower.  I am willing to risk a move to 4300 in order to try to catch a move up to 4500-4520, with the view that the odds of it hitting 4500 before 4300 is greater than 50%.