Continued Selling For Next Week, More Losses Set: Here's What's Next

Summary

• This is going to be a sustained sell-off. Mentally prepare for three to six weeks of selling. I have some tactics that I use to keep my emotions at bay.
• Like I have been calling for weeks now, as the virus bears ease off the stage, the recession bears will enter. That gives another great opportunity for alpha.
• I regularly call for building cash when I see a gap in the rally. This time the gap came with time to prepare. I hope you did.
• Please play out your cash very slowly. This dive will be for longer and lower than you think.
• Choose your targets wisely. I go for high beta names that swing widely with market moves. These are generally tech-related names. This Sunday I will address candidates.

First the set up for next week, is what happened this week

Whether it’s a spurious correlation with this Thursday’s jobs number and the start of this torrid sell-off, it all has been "concretized." You would not be shocked to learn that I believe these two events are tightly linked. Why now and not the four other times? Well, if you have been following along, my major thesis is that once the actual virus appears to have begun to be vanquished that attention would be diverted to the actual destruction of the economy. I said this as my first piece back in April, perhaps it was too soon, but I hope it gave you a basis for your trading. Now that this action is in front of us, we naturally need to cast our gaze to the next hill. Even as this next hill will be a steep one to climb I believe the vista will be of clouds breaking up to reveal the blue skies and sunny climes of late spring. There's the struggle ahead but the reward is there at the top. What do I mean? Even though there will certainly be a lot of wreckage and lives badly affected, there will also be an opportunity. The public market generally contains the majority of the best companies on the planet, and our job is to find value and allocate funds to those very fine companies.

Unfortunately, in order to scale the next hill, we have to get over this chasm

I must assume that if you are reading my notes that you must have taken heed and set aside some cash to take advantage of the sale on stocks. If you have, and you also wrote calls on your remaining positions, you should be confronting this dislocation with excitement and anticipation. One can argue that we all should have been prepared for the swoon in March, but even though we saw the epidemic unfold in China, and even if you knew that the CCP was lying about the number of infected, the extent of their lies was not clear until it was too late. It's only money, and I hope that you and all the people you love went through this tough time physically unscathed. Now, we should have been prepared for this next step, and I'm going to assume that you are. This morning, even as I was telling you all to generate cash, and even as I was, I could help also laying out a little of my cash to start new positions in preparation for the sale. This is an exercise of discipline for me, because even as I create all sorts of lists, the first thing I do when I start allocating funds to the long side, I add to my current stable. If I don’t do this then when I do start looking for names to pursue I tend to buy on impulse. This is something I try to avoid obviously. I want to avoid any chance on letting emotion get in the way, and disorder brings emotion.

I try all kinds of mental games to keep to a discipline

I don’t know if you’ve noticed, so let me just come out and say it. I create “games” to enforce a disciplined approach to trading. Some of you might find this silly, some of you feel like they can wing it and not lose their way. My hat is off to you. If there's anything that experiences in life as in trading is that it gives you an opportunity to know yourself. I know my strengths and I want to use that strength to balance my weaknesses. It's my hope that others find these ideas helpful. The whole concept of “cash management” is really a construction to avoid the idea of taking profits. Taking profits is a fraught exercise, that I as a trader struggle with. Do I? Don’t I? Ride your winners, sell your losers? What? So when do you sell your winners, when they are losers? Then when you finally sell, you have seller's remorse, or if you don’t sell you have remorse as your profits evaporate. So I started looking at it from the risk side, generating cash on a semi-regular basis when I see a possible break in a rally. The rest should be familiar to you. So now we see the benefit of using a cash management construct, the goal was to generate 25% to 35% cash. Most of you did not make that goal I suspect, and that's OK, maybe you have 15% to 20%? Good! Very good. So now what do we do with it? Please, before you start spending it, take one good look at your portfolio. Are there any stocks that you are shaky on? Right now you need conviction. That is because I'm going to ask you to stop looking at the losses in your portfolio for the next three to six weeks. I suspect that by week 3 we will see the other side of this. I am going to focus on high beta stocks. Generally these are technology names that swing hard with the market moves and then create great alpha to the upside. If you generated that cash by following my recommendation to sell a few shares every day, I want you to do the same in acquiring shares. When I say a few I literally mean one to seven shares every day. Please make sure that you space out these purchases meaningfully, let’s say 3% to 7% to 15% lower for each tranche in the beginning. Amazon (AMZN) is down 7% today in one shot, so maybe you buy a share of that. This sell-off could last two to three weeks and fall to as far as 2500 in the S&P 500. Let’s look at a chart of the SPY to get our bearings here.

To my eye, this 2640 level looks like it could be the most solid as a base. When most market commentators speak about the sell off they all talk about the 2650 level as the one that will hold. I think we should all play technical chartists right now and treat this 2730ish level with respect as well. We may just bounce off this level, and if you are buying slowly into the dive, please prepare to trim once again if we bounce off of that level first. I guess what I'm getting at is that this is a multi-week action. I'm repeating this in a few different ways today, not because I think you are slow on the uptake, I'm really telling MYSELF this. I tend to get excited in my buying a dip, only to find that dip is deeper than I expected, or that I knew intellectually that the selling wasn’t done but I got caught up in the excitement of buying. Maybe you are more in control of your behavior, great then you can get the benefit of my calls and ignore my trading practice. I'm addressing the possible thousands of you out there, that know what they should be doing, but in the heat of battle find that they don’t do what they should. The very wise Mike Tyson once said: “Everybody has a plan until they get punched in the mouth.” I'm trying to give you the tools to avoid getting punched in the mouth in the first place, but if you do take a punch, you should be able to counter punch. For us, that means using ways to eliminate emotion from trading, have a plan, and stick to the plan, understand the terrain, and have a map to negotiate that terrain. Our map is the charts. Stick to the chart, understand what the chart means, respect price.

Now what happens next week

I started by stating in the title of this piece that the jobless number is now solidified as a signal to sell off. The market was making new highs to levels that were clearly unsustainable, and I spent the last three articles stating that so I won’t repeat. That said, some of you might observe that the last four times didn’t perturb the market why would this Thursday be any different. The first thing to respond with is price, the incremental value of the future stream of cash flow no longer justifies the high value we reached. The other is equally obvious, we now are above $30 million out of work, which is more than the entire Great Depression. Likely next Thursday we will have another 3 million newly out of work. I think that's plenty of reason to sell going into that revelation. Add to that the historic overall April employment number next Friday will give us a climax of selling starting on Wednesday. Maybe the actual number on Thursday won’t be as bad expected and we end up rallying, but then I would expect an even bigger slam on Friday. How about this today, this Friday? Well, right now we are selling hard but it doesn’t feel like panic. Sure the VIX is down about 10% but that isn’t enough to qualify as panic selling. If the selling does get disorganized at the last 15 minutes then we would likely get a positive open on Monday morning. Do not buy that open - sell it.

Please respect your cash and tail it out very slowly. Treat any up day as an opportunity to sell not buy.

On Sunday, I will go through more about what I want to buy.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Comments

[NervousNeville]

Have you written an honest follow-up to this one? lol.

[Code Talker Market Analysis]

@NervousNeville
See my assessment right below yours. I wish the author for post a correction. The market he predicted would correct did not.

[Code Talker Market Analysis]

May 1: Author states:
"This is going to be a sustained sell-off. Mentally prepare for three to six weeks of selling. I have some tactics that I use to keep my emotions at bay."

May 1 SPY: 282.79
End of May SPY: 304

The author's call was not the exact low of the three weeks, but it was close: 281 versus 282.79.

[Code Talker Market Analysis]

May 1: Author states:
"This is going to be a sustained sell-off. Mentally prepare for three to six weeks of selling. I have some tactics that I use to keep my emotions at bay."

May 1 SPY: 282.79.
June 21 SPY: 308.64.

The author's call was not the exact low of the three weeks, but it was close: 281 versus 282.79.

The market has stayed significantly higher [7.5% to 8.5% higher] in a sustained way during the same time the author claimed sustained selling.

[Michael Clark]

It's ok to be wrong, David. We all are wrong some of the time. (We don't need boogeymen to blame when we are wrong. Be eager to see what is real and to reform your perceptions when needed.

[What Privilege]

I came back to this article to comment and congratulate you... looks like you were just about a week early. Not sure if this is the "significant" sell-off you were looking for (we'll see how long it lasts), but I took the chance to lock in some gains last week, and now redeploying that cash and some new funds for some very nice yields. I missed the big dip on March 23, but thanks to your stern warning on 1 May, I was ready this time.

[mr clark]

they will keep printing $$ to hold this up, likely a strong down move is a ways off, maybe when the prop-up $$ is gone (July?)

[Michael Clark]

@mr clark

For whatever reasons (there are always reasons and people to blame) you BEARS were just WRONG. Right? REALITY does what it wants to do and then the experts tell us either how smart they were or how REALITY was wrong.

Opinions are like what? Everyone has an opinion; but not all opinions are equal. Some opinions conform more to reality than others; and the more one is prone to idealisms (or ideologies) the less reality one is reflecting.

[mr clark]

no ive been right, in gold in silver since 2003, and generally only short SPY on highs (like now)

[Michael Clark]

Going even higher. BUY ROKU.

seekingalpha.com/...

[Michael Clark]

CGTS MONDAY: WE ARE GOING HIGHER; SWEDEN IS RIGHT

seekingalpha.com/...

[Qichar]

@Michael Clark

Your article you linked is certainly interesting. It will take me a while to unpack all of that information.

Regarding Sweden being right, I don't know if this has anything to do with anything, but one of the statistics I'm tracking is deaths / total (known) cases. For Sweden, that ratio is 12.15%, which is unusually high. The United States, which in my opinion is handling the "lockdown" (if we can even call it that) as poorly as any nation in the world, has a fatality ratio of 7.9%. I don't know what causes Sweden's fatality rate to be so high, but it is worth noting given their different course of action.

Before any of you jump down my throat that this statistic is NOT the true mortality rate of COVID-19, of course I know that. The statistic does not take into account how many people have contracted COVID-19 and were never counted because they were never tested. Perhaps they were asymptomatic, perhaps the hospitals near them were over-taxed and they didn't think it necessary to visit a doctor. I'm most interested to see what happens to these numbers as the US is currently in the process of reopening its economy.

The new cases in the US does very slightly seem to be leveling off, but going off of the results other countries are reporting I would have expected it to be more noticeable by now. I think this is further evidence of how poorly Americans follow instructions and how half the country doesn't treat this illness seriously. Places like New York have really started to level off while places like Georgia seem to be further back on that timeline. Texas doesn't seem to be leveling off at all; if anything, their curve seems to be steepening again. I was speaking to my wife's parents and at least they do not seem to be taking COVID-19 seriously enough. My father in law went to the doctor and he wasn't wearing a mask! The doctor said he tried to wear it for a day and then quit. Not the best example for the medical community to set. The responses in the nation to COVID-19 are really varied, to say the least.

[Michael Clark]

@Qichar
I am not going to jump down your throat. Your response is sober and thoughtful. Who knows which of us and which country is right about this?

Sweden's point was that the virus was going to become a permanent part of the human landscape -- so the thing to do was to absorb it. Most people recover (the old and very sick to not) and develop anti-bodies to resist it the next time around. Quarantines mean fewer people are exposed the first time through -- and the second wave will mean we will all have to get sick for the first time and go through all this again. Why not do it right away?

It seems to make sense to me to do it this way. People DO die, not matter what. But we become immune much faster the Swedish way.

Maybe.

[user50295553]

"It ain't over till it's over." — Yogi Berra

I don't think we know yet, just when that will be. IMO it is too soon to tell.

[igalsn72]

Why not just buy TZA and enjoy the ride down x 3 ?

[horuss]

This read like fearmongering to me. If you create enough fear then you'll have people selling because of their fear that what they've heard is true and you have a self fulfilling prophecy. Look at what actually occurs. Don't listen to oracles. Their predictions are never certain.

[kamax1]

just buy the P&G's of the world, and buy the dips, tho i know exactly what the market will do. What you ask? some days it will go up,some days it will go down, and then it will go up higher, and then will go down some lower!

[JRS5]

BEWARE WHEN SOMEONE SAYS THEY KNOW WHAT THE MARKET IS GOING TO DO!!

[Samson7]

Good call @David H. Lerner. We now have a second day where the DOW has gapped down on the futures open. It does however look like the market will try to buy it back up. But if we backtest on prior support we are going down anyway. Nothing can be done to stop the inevitable now. It's just a process.......

[Samson7]

Also, DAX opened 4% down tonight. And the Saudi Tawadul was more than 7% cratered on Sundays open. That had to hurt. This is going to be more than interesting. I noticed all the bulls have stopped posting. SA just went silent all of a sudden on all the articles I had been following.

As usual, nobody believed so nobody prepared. Prices on put options will be through the roof again by morning.

[Samson7]

VIX futures are on their way to 44 and it could happen really fast. Like this week. It's already in the bag so that tells me the sell off will gain strength as the week progresses.

[Michael Clark]

@PM Analyst

Don't follow the fear-mongers.

Ticker Close Change %

^VIX 35.970 -3.28%

[Glenn Abrett]

STOP. STOP. STOP. SA stop printing these articles, some bearish, some bullish, where someone starts saying "This WILL happen". "The market will sell off for the next six weeks." "The bottom in in." "xyzzy, dead even before the virus stock, is a super bargain and will return 29.37% annually for the next 11.65 years." Please. Just stop.

I mean what kind of a lame Donnie Dimwit type dude do you have to be to think that you know the market direction at this point. It is the most complicated and confusing situation in the world there has been, pretty much in my lifetime. Step back and look at it rationally. The possibilities, both good and bad are innumerable. We could have a 30's style deflationary depression. We could have hyper-inflation. We could have significant social unrest. Even here. We could have a major overturn of the social order. We could have iron-fisted dictatorships almost everywhere. Some group desperately trying to find a vaccine for CV could untangle the basic machinery of a cell to a level not seen before and cancer could be cured. Or even aging. Or who knows.

It's insane. And insanely complicated. And the very best minds on the planet have no idea what the future will bring. The only folks that seem to have any idea are the SA pundits who keep writing these Donnie Dimwit articles.

[Code Talker Market Analysis]

a lame Donnie Dimwit type dude

I love it.
So true.

[Qichar]

@Glenn Abrett The title of the article is maybe a little too specific, yes.

However, I think there are some facts we do know right NOW, right? We know that a lot of economic damage has already been done, the unemployment number will be very high, and the government is injecting an unprecedented amount of federal stimulus into the economy.

We also know something else. The market is not the omniscient, 6 month forward looking oracle that some believe it is. It is composed of individuals who buy and sell. And we know that there has been some really dedicated buying since mid-March. Why? Because prices rose dramatically--too quickly. What usually happens after too much buying has occurred? That's right, selling. And before you tell me that every purchase has a buyer and a seller, you know that's not what I mean. Of course I mean that buyers were willing to pay increasingly higher prices since the dip in mid-March. So let's not pretend that technical analysis doesn't exist. Setting aside all we know about the underlying economy right now, what we DO know for sure is that people have really extended themselves to "buy the dip," and the selling that coincided with some major earnings reports suggest to me that profit taking was happening on Thursday and Friday. When does profit taking usually happen? Right as the suckers who fear missing out want to buy in and right before another big drop happens. You don't have to know anything about the underlying economy to read a stock chart.

[retiredboeingeng]

Sold half my small cap holding last Wednesday and keeping it in cash. Looks like that was the high point for a while. Waiting for a big plunge to get back in. Might just keep it out and look for some real estate over the next 6 months. Getting nervous about keeping stuff in US dollars.

[gold_seeker]

Move to physical Gold.

[firemanbob0854]

Been moving steady into more real estate, as in residential housing and gold, for two years now. Have been trying to create a monthly income situation that I can lean on as I/we move close to retirement. Now this CV-19 thing. Good reliable people with families are calling to say they may not be able to make payments next month. I know this too shall pass, in time. Just scary times we are in now

[SmartStops]

Want discipline? Then get yourself a Smart(R) trailing stop. One that knows how to adjust intelligently and not based off some random % price fluctuation or simple technicals like moving averages, rsi etc. Get one that actually knows how to adjust up & down, so you can ride sideways movement easily but really get notified when you should either sell or hedge.

[King of two things]

Jeez, I would love that, I struggle with knowing where to place stops. I know choosing some arbitrary % is silly, but determining just how much gain you’re willing to sacrifice to reduce the possibility of a whipsaw is difficult.

You’re absolutely right though, well placed stops get rid of the need for all these ridiculous prognosticators.. not to say there ever is a need for dingbats pretending to know market directionality.

[Sundance Utah]

I drove around Salt Lake City yesterday in the foothills and could see the whole Salt Lake valley with its million plus people and innumerable buildings everywhere. It dawned on me, the Federal Reserve could buy everything in sight, the whole city and would barely make a dent in their balance sheet. They could buy Denver, Las Vegas, Los Angeles, they have the money to buy whole cities, whole nations. Who does the Federal Reserve want to protect and what will they do to protect it? That is really the only question.

[User 1128647]

The government is providing liquidity when liquidity is desperately needed. I.e. they are stepping in to lend money simply because no one can or wants to lend money. They don't want to buy your business they just want to loan you money because its the easiest way they can make MORE money.

[Diesel]

All it takes for us to have a one mild red week for all bears to come out saying "we'll drill down and make retest recent lows".

[Code Talker Market Analysis]

I'm going to keep close to the sell button to protect recent gains, but I'm going to also set a calendar reminder to check back here in 3 weeks from May 1:
"This is going to be a sustained sell-off. Mentally prepare for three to six weeks of selling. I have some tactics that I use to keep my emotions at bay."

I'd recommend others set their calendars and check back here in 3 weeks to see if we saw sustained selling.

If not, we can let the author know.

[User 1128647]

The exact same thing happened with the bulls last week. "We are out of the bear market" etc etc

[SmartStops]

Jus use a smart risk warning system. :>)

[panzer]

Conclusion from David who is smart, we will have an imminent sell off that can bring us down to breaking 2500 at the lows but that is it. He has good reasoning.

[Clairvoyant Investor]

Solid article as overbought conditions are due for a sustained breather. Agree with a 3-6 week selloff as this will serve as a reason for the Congress to pass a phase 4 stimulus and push the Fed to restart and continue it's arsenal of artificial inducement. The worse it gets the higher the probability for more massive stimulus from all lawmakers and significantly increasing the lending/credit facility extension from the Fed

[Starship53]

@David H. Lerner A very sensible article but timing is always Difficult.I don’t think Mr Trump
Will be very happy with ksa and I expect them to reduce production rapidly.If they don’t the USA may decide to pull back military support .A change in oil price could have a dynamic effect on the us economy.