VTI Enters the 'Stubborn Stage' of a Possible Reversal
Updated
US indices and most stocks are now trading at areas that make little rational sense for them to remain at without there being big corrections. The questions at this point are when and how big are the corrections to be.
VTI is trading slightly above the 1.61 projection of the 2018 fall. Above this area is where I get most interested in selling, but it is also a point that can produce quite a lot of selling risk as price moves can become more stubborn. Unsophisticated buys will continue to enter the market, they make the fundamental mistake of thinking because everything is higher it is worth more, of course usually it is just more expensive.
The risk for sellers here come in the forms of grinding up moves with various fake reversals and also in parabolic spike moves to the upside. Both of these means early selling has to be lighter with good stop loss controls. If stops are used well and losses are capped then multiple attempts at selling higher prices can also be taken.
The less risky alternative here is to wait for a break back under 170 and then build up shorts into the nearer term downwards momentum. I think upon selling price break back under here, we'll see the end of the US bull market.
I'm now starting to hunt out stocks I can sell high that are likely to suffer liquidity shocks on the way down by being heavily over traded in ETFs. If these things start to fall quickly, ETF owning bundles of stocks are going to see investors wanting out, and in turn they're going to have to go to the primary market and hit all the asks for the stocks. Many of these stocks are trading thinner volume in the primary market than they are in the secondary market of ETFs. To put this simply, it means someone is going to want to sell 100 times more of a stock than anyone usually buys, and an absolute this is going to be at a time the stock is in an absolute mess, so no one wants it.
When there is not normal liquidity in the market, the short fall for this is going to have to made up with market makers. They will not blindly buy in the style we've seen stocks bought up to this point. For them to take on the risk (which they will be obligated) they will want to take prices to where they can do buy/sell business (limit their risk). This means a stock might be currently trading at $20, but the market maker won't take the risk on anything above $15. What happens then? Since the market maker is the only buyer there, the ETF has to hit the ask - they sell a stock trading $20 for $15 and there is a big gap in the market.
The above is what Dr Burry talks about when he refers to passive investing as a bubble. At some point there are going to be more volume of sell orders hitting the market than there are buyers (in typical volume of trading) to meet them. When this happens the sellers have to take any offers they can get, and they will get them only from those who have to give them offers and will do so on their terms - which will not be at 'moon prices'. These will be at heavily discounted prices.
Gaps in the market are bad. Generally they scare smaller investors. They remove risk control from big investors and may trigger margin calls in some cases. With margin calls happening, this cycle of sellers having no choice but to hit any ask, and market makers having no choice but to provide offers to buy lower than the current market price. This can lead to more bigs moves down and maybe even more gaps which can feed upon itself.
This is going to hit the passive investing marketplace like an earthquake, and this earthquake will quickly shift over to the primary market where it starts to do real damage. It then will cause a series of predicable aftershocks that will lead to heavy sell offs in all stocks and the worst in the more thinly traded ones. Some of the thinly traded companies may well have trouble surviving the onslaught of their stocks being bought up more than they should have been and then suddenly dumped into the market maker only markets. Insolvency will become a real risk as this develops.
VTI is trading slightly above the 1.61 projection of the 2018 fall. Above this area is where I get most interested in selling, but it is also a point that can produce quite a lot of selling risk as price moves can become more stubborn. Unsophisticated buys will continue to enter the market, they make the fundamental mistake of thinking because everything is higher it is worth more, of course usually it is just more expensive.
The risk for sellers here come in the forms of grinding up moves with various fake reversals and also in parabolic spike moves to the upside. Both of these means early selling has to be lighter with good stop loss controls. If stops are used well and losses are capped then multiple attempts at selling higher prices can also be taken.
The less risky alternative here is to wait for a break back under 170 and then build up shorts into the nearer term downwards momentum. I think upon selling price break back under here, we'll see the end of the US bull market.
I'm now starting to hunt out stocks I can sell high that are likely to suffer liquidity shocks on the way down by being heavily over traded in ETFs. If these things start to fall quickly, ETF owning bundles of stocks are going to see investors wanting out, and in turn they're going to have to go to the primary market and hit all the asks for the stocks. Many of these stocks are trading thinner volume in the primary market than they are in the secondary market of ETFs. To put this simply, it means someone is going to want to sell 100 times more of a stock than anyone usually buys, and an absolute this is going to be at a time the stock is in an absolute mess, so no one wants it.
When there is not normal liquidity in the market, the short fall for this is going to have to made up with market makers. They will not blindly buy in the style we've seen stocks bought up to this point. For them to take on the risk (which they will be obligated) they will want to take prices to where they can do buy/sell business (limit their risk). This means a stock might be currently trading at $20, but the market maker won't take the risk on anything above $15. What happens then? Since the market maker is the only buyer there, the ETF has to hit the ask - they sell a stock trading $20 for $15 and there is a big gap in the market.
The above is what Dr Burry talks about when he refers to passive investing as a bubble. At some point there are going to be more volume of sell orders hitting the market than there are buyers (in typical volume of trading) to meet them. When this happens the sellers have to take any offers they can get, and they will get them only from those who have to give them offers and will do so on their terms - which will not be at 'moon prices'. These will be at heavily discounted prices.
Gaps in the market are bad. Generally they scare smaller investors. They remove risk control from big investors and may trigger margin calls in some cases. With margin calls happening, this cycle of sellers having no choice but to hit any ask, and market makers having no choice but to provide offers to buy lower than the current market price. This can lead to more bigs moves down and maybe even more gaps which can feed upon itself.
This is going to hit the passive investing marketplace like an earthquake, and this earthquake will quickly shift over to the primary market where it starts to do real damage. It then will cause a series of predicable aftershocks that will lead to heavy sell offs in all stocks and the worst in the more thinly traded ones. Some of the thinly traded companies may well have trouble surviving the onslaught of their stocks being bought up more than they should have been and then suddenly dumped into the market maker only markets. Insolvency will become a real risk as this develops.
Note
First major support reached. Pull back expected.Note
Probably spike low now and then make a bigger rally.
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