[Quick update] Capitulation. Don't panic (Patreon)

The sell off is accelerated on Monday (August 5) and is showing signs of capitulation. It is rare to see the US indices fall 5% in a single day (Japan’s Nikkei -12%).

The fundamental reason is labor market data last week was worst than expected so now the market is pricing in a higher risk of recession. While true, this cannot explain why markets fell 10% in a week. The economy is like a giant boat in the ocean, it doesn’t suddenly make 180 degree turns.

The more important is mechanical reason driving massive unwinds and no one is willing to buy in this environment. When there is no bid, things can fall very fast.

On top of that, VIX index exploded from multi-year low of 12s to multi-year high of 50. This may be a ‘Volmageddon’ event where billions of dollars poured into option selling strategies (e.g. covered call ETF) to juice up return are getting destroyed.

I’m already hearing on the street some funds are getting liquidated which is exacerbating this sell-off as they dump their holdings. And guess what they are holding, the crowded trades: Mag7, Japan, and AI.

At this point, my trading portfolio is extremely light. As mentioned on the weekend update, the stocks on my prior watchlist like MS, NEM, PM, PLTR, RDDT, etc have all been stopped out or taken profit after the volatile move last week. So today’s slump is not affecting my trading portfolio.

From a trading perspective, in a very short timeframe, I think the market is oversold and will have opportunities to play the bounce. These will be likely intraday opportunities. I would not be comfortable putting on swing trade positions at the moment.

From a long-term investing perspective. Don’t panic. Wealth doesn’t go up in a straight line, there will be drawdowns and that’s ok. I try to accumulate assets when they become cheap. This is a 10% correct on S&P500 which doesn’t happen often. If it falls a little more to its 200ma, I’ll be happy to add to my investment.

Disclaimer: The content of this post is solely for entertainment and not investment advice. Any views expressed in the below are the personal views of the author and should not form the basis for making investment decisions, nor be construed as a recommendation or advice to engage in investment transactions