Samwise Quick Reference Handbook
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Sam, Assuming that QQQ tops out soon around $540 or higher, as of right now, how big of a correction are you expecting, maybe 5-10%?
Hi Richard, I just posted an update that directly answers this very question. It’s the 2:05 Pm update. But it took me a good hour or so to write. But we get right into that question. here’s what we said as a tl;dr:
40% chance of a correction of 14%+
40% chance of a correction in the 10-12% range
20% chance of a correction in the 8-10% range
There’s good reason for this specific breakdown. You’ll see it above. I do think we’re probably more likely to land in the 10-12% range though. As a general default, we’re expecting something close to the overall mean/median which stands at 12%.
Take a look at the update. It gives a pretty thorough response.
Wow, Sam, that might hurt NVIDIA then, because it’s often a 2x or 2.5x correlation, or even more than 3x over the last 6 months, so a correction of at least 30% is expected for NVIDIA in the short term, I’ll be more specific this time 🙂
Best
Karl
On a 10-12% decline, you can expect Nvidia to decline 22-25%. That’s what we’ve seen historically. If the QQQ falls 14%+, then probably in the 25-28% range.
But there is still potentially a long time until we see a correction. We’ve reached a critical return rate at 33%. But in terms of time, the rally could easily still be at the half-way mark.
We’ve seen plenty of 80-90-100 day rallies. We’re only at day 46. We can easily see a situation where the market climbs very slower over the next 30 sessions until we get to August. It could spend all July slowly grinding toward $550-$560 a share. Look at what the QQQ is doing right now. This entire week is basically one gigantic waste of time. Nothing at all happened this week. We barely moved.
So just keep in mind it could be until August before we see a correction. The best we can say is sometime between NOW and August is the likely timeline for a correct.
How do we deal with the possibility of US exceptionalism ending? i.e what if we end up with a situation like the Japanese financial collapse and their lost decades? I personally still have strong faith in the US economy but am interested in hearing your opinion on how more conservative investors might hedge against such risks.
So like you, I have strong faith in the US economy. I also believe that US exceptionalism is a thing permanency. The nation has been the leader in innovation for well over a century now. Almost every major innovation of the last 100-years is connected to the U.S. in some way and that is the case even today. So I don’t think this will be a thing.
But let’s suppose, for the sake of argument, that we start to see a decline in US exceptionalism and growth slows drastically.
Even if that were to happen, the strategy we employ right now would still bear fruit. We employ a hedged strategy. Think about it.
If the stock market were to enter into a dot-com era collapse right now, would portfolios would skyrocket in value. If we had a full-blown collapse, we’d end up making a massive amount of money on the collapse.
Notice that the Arryn Portfolio was worth more down near the $410-$430 area than it was up near the $500 level. We saw the portfolio push up to $150k down there. Of course in the zone between $540 and $500 we saw declines as the hedges didn’t start to have an impact. And in the zone between $500 and $470, we started to see the hedges work. By the time we got to around $450, our puts were worth more than our calls. Meaning, we started to make money as the QQQ declined from $450 down to $400. It was profitable for the portfolio for that drop to occur.
We wouldn’t have transitioned back into heavy long unless we had the major indicators that we had. Notice how we chose not to transition all throughout the sell-off down to the low $400’s. It wasn’t until the low $400’s that we started to transition. And we fully transitioned out once we had clear-cut capitulation.
We’d do the same thing in the future and we’d gain the benefit of the rebound while riding the declines.
Notice that if rather than return to the highs, the QQQ peaked at $470 and then crashed to $200, we would have made a killing. Remember, we bought DOUBLE the hedge to protect all of our profits and even produce a return in the event of a crash.
So that’s how we would do it in an acute sell-off.
But even in a slow developing process — such as the decline in U.S. exceptionalism which would take years to develop — hedging is still the way to go. We go long and hedge. The hedge will handle the declines in the market.
Just saw a notification from the app saying something about HIGH correction risk, but can’t find where that notification led to. Was that a post update?
3:45 PM post.
At what level is the double top bear market scenario out of play (or at least extremely unlikely)? Would a top near $560 take the wind out of that, or would it need to be closer to the $600 level? Alternatively, does the S&P 500 P/E keep it in the background to some extent no matter what?
The S&P 500 P/E is always present in the background no matter what. It’s an issue that has no expiration date and no immediate need for resolution either. It can stay elevated forever. It can even get worked off if earnings starts to surpass gains in the market. It may never lead to any sort of bear market as bears expect.
The double-top scenario goes out of play in multiple different ways. First, yes a move up to much higher prices would invalidate that. It would probably need a move up to $600 to be honest. $20 isn’t enough. It would still look like a double-top in the grand scheme of things.
If a stock peaks at $54, drops to $40, rallies back to $56 and starts to drop again, that’s basically a double-top still. It’s same thing here. $56/$560 not enough. Probably closer to $580-$600 to invalidate on the upside.
On the downside, it could also become invalid if the QQQ sustains a correction down to $480 bottoms and starts to rally back to the highs. Once it gets up to like $520 again, it’s going to look rather invalid. And if the market rallies back to the highs, invalid. Triple tops are extremely unlikely.
The double-top scenario would take a lot of serious selling to go into effect. Remember, there is no double-top until it’s confirmed. It’s not confirmed until the QQQ falls substantially below $400. Confirmation probably under $380. So it would need to fall under $380 for there to be a confirmed double-top breakdown.
It’s so unlikely. We almost never see things like this play out. At tops, we often see what we saw ahead the recent 25% decline. A long period of consolidation with heavily volatilty forming a multi-month peak.
We saw that ahead of the 2022 bear market and ahead the financial crisis. With the financial crisis we had a large head & shoulders top. But it didn’t span 25%. It was more like a 7-10% head & shoulders top.
The problem with this double-top is that it spans way too large of an area. The QQQ has to drop 25% just to reach the neckline at $400. That’s a very large drop.
It’s always going to be in play anytime the market sustains a correction and returns to its highs. There’s always the potential for a double-top after every single recovery.
That helps puts things is perspective; thanks Sam.