Mostly in cash now. Weekly cap (01 Oct 2021)

This week has been a bad week for the stock markets that I monitor.

Let's discuss the U.S market first. Look at S&P 500.

04Nov2020 marks the start of a strong rally for S&P500. Since then, S&P500 rallied 26.5%. In the past 11 months, there were 5 successful rebounds from the 50-day moving average. It failed on the 6th rebound this week.

The greater the number of times a support line is successfully defended, the greater the significance when the support line is finally broken.

Failure on the 6th rebound attempt off the 50-day moving average is a significant event for S&P500.

Margin debt in the U.S stock market is at its peak today. The higher the leverage, the harder the market will crash when it finally crashes. This is because of the vicious cycle caused by forced selling in a margin call. Stock prices start to fall, someone receives a margin call and is forced to sell his portfolio. Prices fall further and this causes someone else to be hit with a margin call. Prices decline even more, another margin call and so on.

Next week will be an important week to watch. If U.S stock indices continue to decline, we face the rising risk of a 2018 Q4 mini-crash. This time, the magnitude of the crash is likely to be larger due to the much higher leverage level compared to 2018, due to the participation of more retail investors.

A weak U.S stock market is not only a matter of concern for U.S investors. Stock investors all over the world have to watch this market. The U.S stock market is a leader. When it falls, it is hard for other stock markets to stand firm.

Now, let's shift our attention to China stock market. Most of my portfolio was in China stocks at the beginning of the week. It was a bad week.

The first warning shot was fired on Monday, 27Sep2021. The number of new highs had exceeded the number of new lows. What was more noteworthy was that the number of limit-down stocks had vastly outnumbered the number of limit-up stocks. These were worsening numbers that I have not seen for some time. On 29Sep2021, the market took a turn for the worse from its already weak position. Shanghai composite index fell below the 50-day moving average and Shenzhen composite index fell below the 200-day moving average. The broad market fared badly too. It was time to switch to a risk-on mode for China's stock market.

Shanghai composite index hit a 6-year high less than 3 weeks ago on 13Sep2021. The recent decline is off a 6-year high. This makes me uncomfortable as it means prices have more room to fall if a bear market takes over.

I do not use sophisticated risk management metrics like VAR(value-at-risk) that are used in financial institutions. I try to keep things simple since I have a simple mind. The risk metric that works best for me is how much and how quickly my portfolio is losing money. When prices fall below my stop limits, I sell. By the end of this week, I am mostly in cash.

If the market rallies in the coming weeks, I can always resume buying. In the meantime, with high cash levels, I can enjoy peace of mind as a spectator of the market and protect my capital.

Stock market action to take:
- Take a rest
- Get the stops ready and sell remaining stocks in the portfolio if stops are reached.

PS: I try to be as objective in my market analysis as possible. Since I am mostly in cash now, I am aware that I will be subconsciously biased towards the bearish side. So, readers need to be aware of my bearish bent. All of us tend to talk our own book.

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