【December 16, 2020】When will the US stock market correction occur?　【Tetsu Emori Real Trading Strategy】

Excerpt from Tetsu Emori's Real Trading Strategy [Issue 2020/12/6]

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【U.S. Stock Trading Strategy】

U.S. stocks are firm. The Nasdaq index has again reached a new high. The FANG index rose by more than 2%, and buying in tech stocks continues. It seems investors' interest in tech stocks remains unabated. All major stock indices rose on this day, but the Dow Jones Transportation Average posted the smallest gain. It seems others rose and dragged it up, but the small gains suggest this index is reluctant to rise much. A decline in this index should be watched closely. Also, on this day the VIX and VXN fell sharply. Investor optimism was strong on this day.

However, the view that it is overheating in the short term remains unchanged. The NAAIM Index is at its highest level in the past two years, and Bank of America’s Bulls & Bears index shows a sell signal for the first time in three years. This signal appeared in January 2018, after which stock prices fell more than 10%. The credibility of this index is widely recognized in financial markets. Still, investors continue to buy stocks due to vaccine expectations and a reluctance to miss the recent rise. However, such investment decisions are extremely dangerous. It will be very interesting to see how this stock surge ends.

Short-term trading strategy remains unchanged. Dow, S&P 500, Russell 2000, Nasdaq Composite, Nasdaq 100, and FANG index are all long signals. However, the view that a pullback is near remains. You could close out your existing positions and wait to see what happens. Personally, I have already exited my short-term positions. Even if you cannot capture further upside from here, that is not a particular problem. The downside risk is greater. From a risk/reward perspective, going long from here is not wise. Also, the results of the FOMC and market reaction are of interest. If results fall short of market expectations, it would be an ideal material for profit-taking selling. Buyers are already buying at high levels. There are certainly a substantial number of investors who would incur paper losses if prices fall.

For long-term portfolio strategy, pay particular attention this week to buying on dips. From a level 5% below the recent high, buy in increments of 2.5% up to 20 times. Ideally, you would like at least a 10% pullback. After all, in long-term investing you want to buy as cheaply as possible. If you start preparing now, you won’t miss buying opportunities. For the Dow, start buying below $28,800; for the S&P 500, below 3,525 points; for the Nasdaq Index, below 11,975 points. Which index to buy is up to you, but the S&P 500 would be the safe choice. Nasdaq Index or Nasdaq 100 would also be acceptable. Prepare funds to be able to buy even if prices fall by up to 50% from the highs, and calmly buy on the dips as prices drop.

In this long-term portfolio strategy, it is better to invest using CFDs or ETFs. If possible, avoid leverage. In that sense, physical ETFs would be preferable. And gradually accumulate long positions. The result should lead to asset growth. If you can buy on a large dip, your assets should steadily increase.

Basically, if you leave enough firepower to buy even after a 50% drop, you are likely to be rewarded in most cases. Stock prices will eventually rise. Forgetting that and buying all at once leads to odd results. By diversifying across assets and time, you can buy on dips during major declines and monetize them in the future. Always keeping cash on hand so you can buy in a downturn is the most important point for growing wealth through long-term investing. Personally, I favor a 'Stocks, Gold, Cash – Three-Way Split' approach, but ultimately as inflation strengthens, I expect more of the cash to be shifted into stocks and gold.

＜U.S. Stock Market Short-Term Trading Strategy＞

Dow: Long

S&P 500: Long

Nasdaq Composite: Long

Nasdaq-100: Long

FANG Index: Long

Russell 2000: Long

SOX: Long

VIX: Long

VXN: Long

（However, stock indices are advised to take profits/close longs）

【U.S. Bond Trading Strategy】

U.S. 10-year Treasury futures should remain short. Long-term interest rates have been rising. However, the reality seems to call for risk-off positioning. Going forward, bonds may be bought, and yields could temporarily fall. On the other hand, high-yield bonds (HYG) should be kept long. Of course, if prices start to fall, exit immediately. If you use CFDs, these bonds can be traded. That said, ideally you do not want to be long on bonds. Conversely, if a risk-on environment returns, interest rates will rise further, and risk assets like HYG will rise as well. Interest rate trends are an important indicator for assessing market direction. By watching HYG, you can gauge investors' risk tolerance.

For long-term portfolio strategy, it is good to always hold U.S. Treasuries, but gradually reduce them. Going forward, gold and cash are expected to dominate. A 40% stocks, 30% gold, 30% cash allocation would be ideal.

＜Bond Market Short-Term Trading Strategy＞

U.S. 10-year Treasury Futures: Short

U.S. High-Yield Bonds (HYG): Long

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【Japan Stock and Bond Market Commentary & Analysis】

CME Nikkei 225 Futures: 26,795 (+105) < +0.39% >

Nikkei Average: 26,687.84 (-44.6) < -0.17% >

TOPIX: 1,782.05 (-8.47) < -0.47% >

JPX-400: 16,109.84 (-85.22) < -0.53% >

Mothers Index: 1,171.07 (-16.81) < -1.42% >

Nikkei futures (Front Month): 26,630 (-60) < -0.22% >

TOPIX futures (Front Month): 1,777.5 (-9) < -0.50% >

JPX-400 Futures (Front Month): 16,090 (-70) < -0.43% >

Mothers Futures (Front Month): 1,147 (-30) < -2.55% >

Govt. Bond Futures (Front Month): 152.16 (-0.04) < -0.03% >

Nikkei VI: 19.45 (-0.08) < -0.41% >

TSE REIT Index: 1,713.09 (-3.03) < -0.18% >

Japan 2-year JGB yield: -0.149% (-0.007)

Japan 5-year JGB yield: -0.127% (-0.004)

Japan 10-year JGB yield: 0% (-0.018)

Japanese stocks fell back. Sell pressure spread mainly among cyclical stocks such as airlines, shipping, and steel. 54% of issues declined, 41% rose. Volume was 1.11825 billion shares; trading value was 2.2219 trillion yen. The Nikkei Average hovered around the 26,000 level, showing increasing signs of stagnation. The stock market is described as a tug-of-war between anxiety and hope. In Japan, the Go To Travel campaign was temporarily suspended nationwide. In New York State, lockdowns are becoming a realistic possibility, raising concerns about a renewed global economic slowdown. On the other hand, corporate sentiment is improving. The persistence of monetary easing and expectations for additional U.S. economic measures remain strong. With mixed positive and negative factors, the Nikkei Average has lost clear direction.

As of December 11, the estimated outstanding margin debt on the two markets is as follows.

（Monetary basis）

Short: 897.961 billion yen (down 6.311 billion yen from the previous week)

Long: 2,494.612 billion yen (down 8.261 billion yen from the previous week)

Margin ratio: 2.77x (previous week 2.76x)

（Share basis）

Short: 494,659,000 shares (up 5,958,000 from the previous week)

Long: 2,148,232,000 shares (up 12,332,000 from the previous week)

【Japanese Stock Trading Strategy】

Nikkei Average futures are rising in the Chicago market, likely following the rise in U.S. stocks. However, 26,800 yen is a heavy resistance. If it breaks through this, a rise above 27,000 yen may be in view. Yet, in a state where U.S. stocks are extraordinarily overheated, it is difficult to become bullish on Japanese stocks in the short term. The current state is about preparing for the next move, and you won't see ahead until this passes. It would be better if there were a pullback that tempts those who bought at high prices to dump, which would make the subsequent upside lighter. There are talks of 'Nikkei 30,000' in the market, but before expecting such a rise, it seems best to first endure a correction.

Whether such movement will occur before year-end or after the New Year is unknown. In any case, a meaningful correction seems inevitable. If a correction occurs this time, I expect at least 10%. A 10% drop from the current level would bring it down to around 24,000. Such a decline is hard to imagine, but a drop to that extent is quite possible. The desire to see it fall comes from wanting to buy at lower prices; other investors probably feel the same. Investors who couldn't buy at the lower prices are likely to share the same mindset.

However, once prices start to fall, buyers pull back—this is the nature of the market. Probably that will happen. Even so, if prices fall to around 24,000, it would become very easy to buy. As repeated, this week is a period with likely adjustments. If a correction occurs, it would be very clear. Over the past month and a half, prices have risen quite strongly. A correction is not surprising. For now, I want to see the results and market reaction to tomorrow's FOMC and the Bank of Japan's policy meeting on the 17th–18th. In the short term, these will attract attention. Anyway, for now, I would avoid buying at highs and wait for lows.

Short-term trading strategy: Nikkei futures and TOPIX are at long levels. However, I have already liquidated longs to prepare for a drop. The current level is mid-range for short-term purposes, and I don't want to buy much. New long positions would be more profitable if they exceed 27,000 yen. The fundamental rule of short-term trading is "trend following": buy what is rising, sell what is falling. In that sense, the current level is mid-range for taking new positions. If you are maintaining longs, respond with caution as prices drop. If the Nikkei falls to 26,500 yen or below, selling may begin.

Long-term portfolio strategy: begin scaling in when the Nikkei falls to 25,550 yen or below. Can you seize the opportunity when it drops? It is an important point. In the long-term strategy, begin buying when prices are within 5% below the recent high, and then continue buying in 2.5% increments. Split funds into 40 portions so you can buy even if the stock price halves. If 40 steps are difficult, 20 steps at 5% increments will do. The P/B ratio at 1x has risen to around 22,500 yen. If it drops to that level, you would want to buy solidly. If it falls further to around 18,000 yen at 0.8x P/B, it would be an excellent buying opportunity. In other words, you should buy on dips roughly every 500 yen.

As repeated, no one knows when a sharp drop will arrive. Therefore, you should always be prepared to buy. Keep 30% of your assets in cash to prepare for buying at low prices. Do not invest all at once. Opportunities will surely come. Waiting for a deeper pullback rather than rushing to buy at highs is the most important point for increasing wealth in the long run. Also, careful, granular money management is the shortcut to success. If you fall below BPS (book value per share), gradual buying down will likely lead to success.

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