I think there is a remote chance of a chain reaction meltdown if the January lows get taken out.
To put this in perspective, I am primarily a bull, I don't believe that market bottoms have to have dramatic capitulations, and I was buying aggressively during the December and early January NAZ sell-off. I am looking forward to the panic if the Jan lows get taken out so I can buy some more. However, there is a scenario where a sell-off takes place that is beyond what is dreamt of in my philosophy. This time I think there is a danger (maybe a 5% likelihood) of things going from orderly selling to disorderly selling to forced, out-of-control, bottomless selling.
I think the weak point in the NAZ market is the large, mo-mo funds (e.g., Janus). These funds (at least Janus) have large, concentrated positions and have not yet experienced major redemptions. If the January lows get taken out and the selling becomes panicky, I think there is a chance that there will be major redemptions in the mo-mo funds. "Buy the dip" is a faith that, in my opinion, is where Communism was during Gorbachev--the accepted wisdom with a few straggling, true-believers but basically no longer having the people's conviction. The unwinding of mo-mo funds' positions, along with the rumors that will be flowing on Wall Street, would result in massive selling with the only buyers being the unsophisticated and the short-sellers. Once one big fund starts to unwind, I think they are all vulnerable, except perhaps the contrarian funds like Dodge and Cox. In the case of a chain reaction, I don't think there is a "reasonable" bottom to the NAZ's fall; could be 1500, could be 1000, could be lower.
If the January lows get taken out and there is a wave of selling, I will be watching PMCS and AMZN. If on the days right after the first wave PMCS starts to drop like a rock and AMZN drops less than the NAZ, I'm taking my chips off the table. |
