I'm expecting the next sell-off to be a correction, not a major

SP:SPX   S&P 500 Index
Here we are, halfway through May and "sell in May and go away" is perhaps in question as markets made new closing highs last week.

A look at momentum here on the monthly chart shows a situation very similar to the one I called out on the weekly chart back in Jan of this year.

Much like the situation back in Jan on the weekly, I see momentum coming off an extreme on this monthly chart, rather than momentum pivots making divergent lower highs. In other words, I expect that momentum will ultimately make a pattern similar to the one I show in pink while price goes up for yet another final new high. Before that can happen, we'll need some sort of correction to drive momentum down. That correction can be sideways or sharp down to the monthly channel support, though my bias is more of a sideways correction since so many traders are positioning themselves short.

What makes me think traders are positioning themselves short, you ask? Well this, for starters:

Additionally, all the profits of doom are coming out of the woodwork to proclaim the end of markets as we know them. Albeit anecdotal, that's just my observation as I look at articles, and newsletters that I receive.

Anyway, the contrarian in me is saying that too many traders and investors "see it coming". The market tends to like to make the majority of traders wrong. So how can the market go into a correction, while still fooling most of those already positioned short? How about a sideways correction, where we get sharp bullish countertrend moves.

So what am I doing here? I'm not totally dogmatic on this viewpoint (and beware of any trader who ever is), so I have rotated a large percentage out of my stock and bond investments into safer holdings throughout 2015. Let's be honest, the market is definitely getting long in the tooth here, so the risk is no longer to the upside. If I'm right, and things play out as I've drawn here, I'll see only a portion of the gains. On the other hand, if the correction turns into something worse, then I'll be making adjustments after it's already 10% or more off the highs, but only a percentage of my portfolio will be long, so I can live with that.

Lastly, I would say this is not a good time for leveraged directional bets, for all the reasons I've stated above. In other words, if you're planning to load the boat on puts, I'm guessing that wont pay off, even if you've bought some extra time premium.

In particular, you should spend no time at all thinking about those rosy scenarios in which the market goes your way, since in those situations, there's nothing more for you to do. - William Eckhardt

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