It has generally been a pretty orderly selloff so far. With the exception of pockets of significant weakness (SPACs and tech innovation come to mind) the selloff appears rather controllable. The S&P 500 index is yet to enter the bear market, Dow transports and industrials are slightly above 32. The real pain has been in biotech, and so called innovative / unprofitable tech companies and SPACs as they have peaked in January 2021 and have been in a vicious downtrend lately.
I rarely have positions in my fund that correlate highly with the overall market. Most of the times such positions are VIX-related instruments and they are rarely index-replicating ETFs. However, this time around VIX is not a good risk-reward opportunity in the low 30s with the S&P 500 down 17% from all-time highs, so I have to look elsewhere.
In my previous articles I’ve touched on the fact that market bottoms are easier to detect than market tops. Market tops are typically protracted affairs, but market bottoms have certain characteristics that tend to repeat themselves. Market internals and investor sentiment are pretty valuable indicators in identifying market bottoms.
This article will present a series of charts that I use to identify and trade potential major bottoms. Let’s understand the fact that major bottoms don’t present themselves very often. The last major bottom was in March 2020, previously the GFC was in January 2016 and November 2011.
Whether it’s a bull or bear market. During the year 2000-2002, which presented three to four strong bounces along the way over those two years.
However, I am looking at the potential of the market and the potential to take advantage of it and my investors. .
I’m starting with bullish percent indices for the Nasdaq Composite. This index closed at 20.91 on May 11th. There are some lower values on this 24-year chart, particularly 2007-2009 and March 2020 episodes. The Nasdaq Composite, with the last cycle coinciding with the end of the bear market and the beginning of a five-year bull market for tech. Obviously, as you can see on the chart there are examples when the index is in single-digits, you will be starting to favor a significant turnaround.
This chart shows the percentage of Nasdaq stocks trading above their 200-day moving average and is all the way back to 2002. corner.
This chart shows the percentage of Nasdaq stocks trading above the 50-day moving average. This particular indicator is much noisier than the previous two, however any time it moves below 10%
This chart shows bullish percent indices for the NYSE composite and is a better indicator for the entire market. As you can see the overall market is relatively less oversold than the tech sector. The implication for me is that tech will bounce stronger once the overall bottom is in place.
One thing I have learned over the last twenty years is that there is no guarantee that markets would not crash from current levels. As a matter of fact, crashes typically occur in vast oversold conditions, and we are experiencing such conditions at this time. That’s the reason why I’m looking for an asymmetric trade opportunity, which would be a very high risk / reward ratio and where only a portion of the Fund’s capital would be deployed.
Instead of buying QQQ, which would be a natural selection, given in these charts, I’m going to buy ARKF, which carries much higher beta and has been declining for the past 16 months. I’d much rather buy QQQ September call spreads or TQQQ, but I’m not sure if the exact timing of the bottom line, and both of those trades would be subject to time erosion. Therefore, I decide to put 25% of the Fund into ARKF and continue to expose them further. My base case is that ARKF rallies 50% from whatever bottom it prints. The rally should last 8-10 weeks and it sucks the kind of risk / reward in a trade that I’m looking for.
My long-time followers know that this is a screenshot of the return generated on the Fund’s account. The Fund’s trading account was up 646% over the same time period.
Source: Interactive Brokers