To The Moon

Navigating in turbulent waters

It has been a while since I updated my game plan here. So here goes for the benefit of those interested. Last week saw a very oversold market and I was preparing for a sharp snap back rally possibly fronted by short covering. The rally was more pronounced than expected and whilst I was expecting around 4050, it went further than that over two days in a strong 125 point rally on the broad market index. No mean feat and credit must be given to the bulls.

So where do I stand here? I still believe the bear market is not over until more data shows otherwise. I believe the current macroeconomics is different from previous markets where equities perform strongly despite ‘walls of worries’. And my thesis lies in the fact that the FOMC is in a credit hiking cycle as well as a liquidity draining one. And the only thing that has the equity market propped up is the hope of a pivot. Compared to previous conditions, inflation was NOT a worry. Hence the Fed has more nous in supporting dropping equity prices via the ‘Fed put’.

Now however, conditions are much different. Inflation is very real and when you look at the US market which is 85% services, we can see a huge discrepancy between manufacturing and services PMI. Manufacturing is in a recession but services are actually holding up well. That actually qualifies for what we call a soft landing but does not actually help the Fed achieve their 2% inflation target.

They need to destroy inflation before it becomes entrenched to avoid history repeating itself. This current group of investors have not experienced a super inflationary environment and have been so used to the Fed rescuing them. But many do not realise that inflation is more important than dropping equity prices. Let me put it this way. Inflation affects everybody. Decreasing equity prices only affect a certain group which is usually the wealthier ones.

So to save the economy, it is essentially important to eradicate inflation rather than save the stock market if given a choice. And the Fed obviously know this from their wordings. As such I believe the Fed realise that the only way to do stop inflation is to run the economy aground into a recession. That will destroy demand and inflation. It’s a tough medicine to take but an important one to save the economy.

As such I believe the Fed will continue being hawkish, inflation to spike up again (Those interested kindly check the commodity charts such as cattle, wheat as well as gasoline and oil - You will see them looking poised to rally.) and a recession to follow as the Fed continues hiking and draining liquidity.

So long as the Fed do not start a new liquidity cycle, I do not see a new multi year bull market yet.

However having said all these, price is still the most important factor. All the thesis will come to nought if price does not follow. As such, I have prepared the following game plan to navigate the choppy waters.

Those who follow my commentaries will know I have cashed out of my positions earlier and am in a full defensive posture. But recent price actions (especially the strong two day five wave patterned rally off the oversold lows) have me updating my posture and the updated one is as follows.

I am expecting a pullback very soon and am watching the upcoming retreat for an intermediate term positioning.

1. Three waves down will be bullish in the intermediate term. That indicates a correction and a possible intermediate term rally to the 4400 region which I intend to ride. However I anticipate the market to top out at the 4400 region before unleashing that final C wave leg down of the bear market.

2. Five waves down will be bearish and I will probably remain in a fully defensive position in anticipation of the final C wave of the bear market that will come sooner. However as long as the 3770 pivot I am watching does not break, the intermediate rally to 4400 is still in play. I will be more inclined to a more defensive posture here however.

3770 is my pivot.

A break below here will see me staying fully defensive as it increases the chances of the final C wave of this bear market happening sooner.

Disclaimer: My game plan is only relevant for those who wish to be nimble. So please kindly do your due diligence as I am merely sharing for the benefit of everybody as a kind of reference. Long term investors who prefer to remain passive might be better off just dollar cost averaging rather than trying to figure out the market!

Thanks for reading my commentary. Hope it helps!

Stay safe! 😊

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