Chuck your biases and just do the opposite of dumb money

Back in April of last year I wrote this: 

We've been in a rather choppy market for the past 9 months which to me looks like a base.  Bears of course are going to say it looks like a bear flag, but I will say this. If I woke up from a 5 year coma and the first thing I did was look at 5 year chart of the market, I'm pretty sure I would say that it looks like the market is consolidating gains from recent years and is forming a base which will lead to an upside breakout at some point.  That would be an objective viewpoint based solely on market action without any biases or influences from news flow, economists, pundits and what have you. 

I didn't see one single person on twitter or in the entire financial media make an observation along these lines. Instead, all you heard throughout 2023 were complaints about how the market was only being driven by 7 stocks (not entirely true) or warnings about the inverted yield curve, SAHM rule, or what have you. Instead of listening to the market, they resisted it.  I know a lot of people came into 2023 happy to just sit in cash and collect 5%. Ok, great. You made your 5% but you  missed out on 25%. And it wasn;t just the mag 7. There were plenty names in consumer discretionary and elsewhere that did well. European and Japanese stocks also had a great year. Now what will all these folks do if interest rates start getting cut while the market is making new all time highs? At first they will resist because the market is "too high"  but eventually they will do what they always do and find some rationalization to get back into the market.  Rates can't get cut with the market at all time highs you say? Think again. Look at 2019. Look at 1995. Look at the 1980s. Rates cuts aren't necessarily the result of a recession. If  it becomes painfully obvious that inflation has settled down - even in the 3% range rather than the 2% target  - the Fed can't justify keeping rates at 5.5%. Furthermore, if it turns out that 3% becomes the new floor, the Fed may eventually capitulate on their 2% target.  

Getting back to the coma observations; this is not the first time I wrote something like this. I did the same thing in 2011 when the market had a big scare and concluded that using the "waking up from a coma" perspective, it looked like  market may just be having a major pullback after having been so strong during the previous few years.  So, what would my outlook be now if I woke up from a 5 year coma and the first thing I did was look at the chart of the market? I would say that the market trend looks quite strong as it's on the verge of making new all time highs. I would say that based on experience, any asset price that makes a fresh new all time gives a powerful bullish signal which tends to lead to further new all time highs. I would also say though that the market is quite extended above its 200 DMA which leaves it vulnerable to a significant  pullback and/or sideways consolidation phase.. These appear to be 2 conflicting scenarios but not necessarily. It is possible, and likely in my opinion, that we see the latter happen before the former. If we don't get a pullback/consolidation and the market does go on to make all time highs, I suspect it will be a bull trap and not have legs....at least initially. That folks is my unbiased  "waking up from a coma" assessment. If I'm going to be wrong, I will likely be wrong in that the market simply marches higher relentlessly. because the all time high signal is quite powerful.

The market is currently doing what it does best which is frustrating both bull and bears a like by not budging much to the downside despite what appeared to be decent excuses to do so such as hotter than expected CPI. One thing I continue to notice is stubborn put buying. I pointed out in November how this was providing support to the market.  At some point these hedgers/speculators will throw in the towel and perhaps that's when the market will see some meaningful downside.  

I do want to reiterate something I stated in my previous post: Despite the notion of "soft landing", the vast majority of outlooks I have read by strategists and fund managers/are NOT embracing it. You can see it by the price targets, you can hear/read it it in their discussions. This once again sets the stage for the markets to surprise on the upside this year. But unlike last year, we entered this year quite overbought with overextended CTA positioning. The market had been up for rare 9 straight weeks and now that it's stalling you are starting to see people quote ominous stats about how the first 5 days of the year of Jan are negative it bodes ill for the market and if January is negative it's going to likely be a negative year. I for one will not give much consideration to this stat because the market had been so overbought to start it and I say this without having a bias. Quite the opposite actually. I'm taking context into consideration. In January of 2018 the market started off strongly and ended the month up solidly. That would have suggested a great year was in store....we all know how that played out. Again, you had to take context into consideration. Heading into 2018 we had a complacent "global synchronized growth" narrative and signs of froth with weed stocks and BTC going parabolic. 

I am not going to let me guard down, but the odds still favor another positive year based on what I'm seeing from a longer term sentiment perspective. I will show a few more charts next time which shows that the level of speculation/froth still has a ways to go before reaching bull market killing levels. 

Looking back and looking ahead

First off, I was wrong about the ST call I made in the previous post. Markets simply powered ahead rendering overbought conditions even more overbought as the Fed's pivot during the Dec 13th meeting caught literally everyone by surprise. With the market having already such a strong run going into that meeting everyone, including me, were expecting the Fed to push back on the market by talking tough as has been the case for well over a year. Instead, they pivoted penciling in 75 bps in cuts for next year. The market has now since pricing in twice as much. This pivot no doubt resulted in some forced buying by shorts and underinvested fund managers. So, now we have markets that are extremely overbought with some overbullish ST sentiment readings. More on that later. 

Looking back on 2023 I was spot on for the most part. I had pointed out from the start how expectations were quite low which underpinned my LT bullish posture. My ST calls were mostly right as well. Sure, I got this last one wrong but as I always say, calling the ST is tricky because the shorter the time frame the more randomness plays a factor.  There's been plenty of headlines pointing how the unanimous call for a recession in 2023 was wrong.  What's the mott of this blog again? For anyone reading this, and I'm not sure if anyone does, how many fucking times must I prove it you that the purpose of the market is to make fools of everyone? In other more kind words, the market will discount the popular narratives out there and so by the time you act on them it's too late. Now, you are hearing a lot of chatter about a soft landing. So, does this mean that this has been discounted and the market is vulnerable to downside surprises? I don't think so. Despite all the talk of a soft landing, it's not even close to being fully embraced. Yes, in the ST you have signs of froth, just was we did in July but then just like now, we aren't at the point where the fundamentalists type managers are fully committed to equities. I listened to several 2024 outlooks from fund companies/strategists and the message was the same for all: be cautious on equities and be overweight bonds vs equities. While there are less calls for a recession in 2024, you won't have a hard time finding them. Guys like Gundlach just keep moving the date forward. What a clown.

According to this set of  Wall Street Strategists, the average SPX price target for end of 2024 is 4861. That's a gain of only 2% from here! Last year at this time, the average target was for a 5% gain. So, if everyone is so bullish about a soft landing in 2024 why isn't the average price target  in 10-15%  range?  

Fund managers are less negative vs a year go but there's still a ways to go before they have fully embraced equities. 

The inverted yield curve is probably the main thing that's still keeping a lot of people still cautious. What does an inverted yield curve actually signal? It signals that the market is expecting short term rates to decline significantly.\This does NOT necessarily have to be the result of a recession, it can be the result of inflation normalizing now that we don't have dire supply chain issues and acute labour shortages. Yes, onshoring and the like could result in longer term inflation pressures, but inflation has clearly been on the downslope and since the Fed raised rates so aggressively to supposedly fight the inflaton (which it did not), then it follows that they will lower rates after it has been painfully clear that the inflation storm has passed. A 5.5% fed funds rate is simply not justified even if  inflation were to run at 2.5- 3% going forward rather than the 2% Fed target. Therefore, the inverted yield curve could possibly be signalling a recalibration  of ST interest rates is coming which doesn't necessarily mean recession. In prior instances when the yield curve went inverted, did it ever happen after a pandemic induced inflation episode?  No. Therefore, it would be naive to just blindly apply the inverted yield curve recession signal to our current situation. Yes, it was different this time! The pandemic induced inflation and labor shortage has also given false signals to other indictors like the SAHM rule and credit card delinquencies. I'm not going to go into details with these, all I will say is that look at what levels therese indicators are rising from....it was either at or close to historical lows and now look at at absolute levels. One word comes to mind:  normalization. 

So, bottom line is that the there is still plenty of room for the market to rise longer term before everyone is truly all in.  The ST is dicey however as once again the CTA types and other momentum based traders are pretty much all in. The tactical indicators are as stretched as there were in late July which as we know was followed by a 10% correction during the subsequent 3 months.  With the SPX flirting with all times high, don't be surprised to see it stay sticky until we surpass it but whether or not that happens, you will most likely get a better entry point if you remain patient. Never chase the market.  I've seen a few different momentum/breadth studies which have shown that when the market has been so strong as it has been, it's actually a strong bullish signal 12 months out with gains of 12-15%. in the offering. So keep that in mind if things get rough. I have some more things to say but I'll save it for a future post coming soon. 

Sentiment reset with some flies in the ointment in the ST

I've had a ST cautious tone on the market in general since mid July. Back then I warned that the market was showing signs of froth and advised against chasing. Symptoms of the froth were a string of very low daily put/call ratios, fear/greed index at 80+, NAAIM exposure 102 and AAII sentiment showing 2:1 bulls to bears. I mentioned how the market needed to shake out the Johnny come lately bulls such as the trend following CTA types who went from low market exposure at the beginning of the year to high exposure.   As the market rolled over I mentioned that signs to look for at a correction low would be Fear/greed index at sub 25, NAAIM at sub 40, AAII bears 2:1 - essentially the opposite of July conditions. Well, these things all happened at the late Oct low. We've also seen CTAs running for the exists at the fastest pace since the COVID crash of 2020 to the point where they were short the market on par with the 2016, 2018 and 2020 lows.  We have also seen the put/call ratio average about 1.05 for the past 3 months which is quite excessive. Even during this latest rebound, the put/call ratio has been constantly above  which usually results in further ST upside.

The other thing I had mentioned a few months back was that the signs of froth we were seeing had implications for the ST, not medium/longer term as there were still plenty of fundamentalist type investors who were still skeptical and underinvested. I referenced B of A bull/bear indicator which is effective in gauging sentiment from a medium term  perspective(1-2years). It had only reached a high of 4.5 in the summer which is only in  the neutral range. Historically, you didn't have to worry about an immanent bull market peak until there's reading close to or above 8, which implied that any subsequent market decline from 4.5 would only be correction.  At the recent market low the bull/bear indicator fell all the way back to 1.4, back into the buy zone, lower than it was to start the year. To sum up, the 10% decline in the market has resulted in a complete sentiment reset,which clears the way for the market to resume its bullish advance which began a little over a year ago. 

Since the October 27th low we've seen quite a rebound in the market. It was sparked by the notion that the Fed has given hints that it done hiking...or at least that was the impression given by a softer than expected tone by  Powel at the last Fed meeting. Jay tired to pour some cold water on that notion yesterday at the IMF meeting by stating there's still the possibility more rate hikes would be needed and is wary of disinflation head fakes. He also told somebody to shut the fucking door.  The market seems to have disregarded his comments for now at least. It's incredible and quite silly how much of a Fed obsession there is out there, as if they are the masters of the market universe; as if is monetary policy is by far the single most important variable of the stock market. As if the disinflation we’ve been seeing since June 2022 was largely due to monetary policy. Go back to my Inspector Gadget post from last year…it’s playing out just like I said it would.

There are some things that I don't like about this latest rebound.  First of all, it was initially driven by the "Fed is done" narrative, which runs the risk of being premature which would not the be first time this happens. The horribly lagging inflation data that the Fed tracks is still not sufficiently suggesting its a slam dunk by any means, however, next week's CPI report will show the impact of significantly lower month over month gas prices and lower used car prices as well.  Perhaps the market has front ran this already. Speaking of inflation, the 5 year breakeven spread is currently at 2.3% and has been more or less around this level for 8-9 months. The day to day readings can get jumpy at times such as when it had a little spike to 2.53 in October.  Fintwit was sure to point this out, implying that inflation was about to flare up again. Funny how fintwit is either quiet or in disbelief when the break-even spread had been hovering in the low 2's for several months. To me, it's not hard to see why this is so.  Shelter is the largest component of CPI comprising 30%  and 42% of headline and core figures respectively and it is baked in the cake for it to decline rapidly in the coming months.  Data used to calculate shelter is horribly lagged by about 12 months. The yoy inflation of market rents/leases have been steadily declining, hitting pre-COVID levels in June and in the past few months are now tracking BELOW  pre-COVID levels. So, it would appear that shelter CPI will be "normalized" by mid 2024 and onwards thereby putting downward pressure in the CPI for the next several months. It's probably likely that used car prices will also roll over significantly from here as well.  

I digress. The ST concerns I have at this point is that we are quite ST overbought now with some indicators of sentiment having rebounded very sharply in short period of time. AAII sentiment went from 2:1 bears to bulls (sufficient to mark a correction bottom) last week to 1.5 bulls to bears this week. That's probably the biggests reversal I have ever seen. NAAIM sentiment also went from 29  last week (another marker to suggest correction bottom)  to 62. 62 is not an extreme number but the huge jump is what's notable. This rally has also created 2 notable gaps in the charts. I fucking hate gaps like that as they tend to get filled, but not all do. The ones that don't, tend to happen at  major inflection points Some people I bet  are still waiting for the March 10, 2009 gap that kick started the bull market to get filled. The correction which started Aug 1 began with a gap down that did not get filled...at least not yet, but even if does eventually, you can see how it had staying power. I would expect the current gap from 4300-4330 will get filled at least. The one below that would require SPX 4220 to get filled. That one I am less sure of.. 

When the market hit a low on Oct 3, most of the aforementioned indicators were signalling bottom ( AAII was the exception at 1.5 bears to bulls, not quite 2:1). Then we got a rally and a lot of folks flipped bullish quite easily as calls for a year end rally became prevalent. The rally turned out to be a nasty headfake to which sentiment became extremely bearish again at the Oct 27 low, more so than on Oct 3 . Now we are seeing similar bullish flipping happening with this rally. I see evidence of people too eagerly turning bullish for a year end rally again, however, the persistently elevated put/call ratio suggests the opposite. In fact, it suggests more upside.

On August 21, after the market had declined 5%  I wrote that the market was ST oversold and due for a bounce but not to expect that such a bounce would lead to a new leg higher. That turned out to be exactly what happened. I think we are in a similar situation but in reverse. The market is now ST overbought after having rebounded 7%.in a short period of time. It was achieved via 2 large unfilled gaps with bullish sentiment reversing very sharply, both of which are not constructive action. On the other hand, the put/call ratio had been stubbornly high all week which is contrary to the bullish sentiment and supportive for the market..That could turn on a dime but until it does it’s bullish and is arguably a more important indicator than sentiment surveys as it shows what people are actually doing with their money vs just feelings. So, It would not surprise me if the market goes higher still before peaking at some point mid or late next week and turns down but it shouldn't result in a lower low as medium term sentiment indicators have been fully reset. As usual I reserve the right to change this view as things unfold. 

This post was mainly a tactical discussion. In the next post I will discuss more about fundamentals and consensus views/expectations for 2024. . 

It's been a while

I've been busy lately and haven't had the time to properly sit down and do a post.  Man, a lot of things have happened since my last post. Obviously the war in Israel is the big one. I've always had a fascination with war history and so I did some research on this conflict and was intrigued.  I was going to give a long detailed take on this conflict but I'm only going to say a few tings. It's a sad situation which will be difficult to resolve because of the ingrained hatred on both sides which has only gotten worse now. Israel is entitled to a response and you can make the case that their response is largely disproportionate but such is war, especially when the weaker nation attacks the stronger one. With Israel being in the position of strength, it will dictate when this current war will end and set the terms for any cease fire or peace agreement; and given Israel's current right wing government, such terms will probably result in the Palestinians being  even worse off which means more resentment, more unrest in the long run. The issues that existed prior to this war will only grow worse. Israel's expansion of Jewish settlements in the West bank is an example of how their current government doesn't give a shit about the Palestinians and is only concerned about increasing Jewish interests at their expense. It's one thing to try to justify a heavy handed approach in Gaza in the name of security (which I believe is punitive) but there's no justification at all for the expansion of Jewish settlements in the West Bank which understandability fuels further Palestinian resentment and violence. For there to be any chance of peace in the long run, Israel has to have a more sympathetic government towards Palestinians. They need to encourage the Palestinians to reject Hamas and other terrorist groups  by offering them a way out and a better life in exchange. Israel needs to show the first act of good faith but that's going to be politically extremely difficult and it definitely won't be with this government. Israel is always critical of Arab countries who don't recognize their right to exist but yet they treat Palestinians with similar contempt. Yes, I get that Israelis will say that this is only because Palestinians/Arabs have always had contempt towards Jews. The cycle of hate and blame needs to stop and it can only happen when both sides agree to wipe the slate clean and have mutual respect for each other's existence and rights going forward. At this moment it seems like an impossible task.  

Next post will be a market update which will come shortly. 

  

  

 

Bearish undertones still there

We got the bounce I was expecting so now what? More on that later. Jackson hole proved to be a non-event as Jay Powel didn't say anything all that surprising. In a nutshell, he said that the Fed is still prepared to raise rates if needed and that inflation although falling is still too high. I'm not going to get into discussing how much of a bonehead Jay Powel and Fed buddies are. I'm not going to discuss how the recent fall in inflation was largely self-correcting and had little to do with rising interest rates. Ok I lied. When it comes to inflation pretty much everyone just focuses on the impact rising rates has on the consumer,, namely the demand to borrow money and the ability to service debts. Rising rates means less demand to borrow money and more income required to service debts, therefore less money to spend and therefore less inflation...at least that's the narrative. But hardly anyone mentions the impact rising rates has on the supply of money. Banks are more inclined to lend when rates go up as they make more profit  Rising rates also creates a fiscal impulse as higher interest payments are being issued on newly issued bonds and savings accounts. Higher rates also increases the cost of capital which can lead to higher prices being charged and raises the financing costs of expanding the supply of goods and services. These supply side impacts of rising rates are inherently INFLATIONARY. Even if you only focus on the naive, consumer only perspective, you have to take into account that the vast majority of  consumers in the US have locked in low rates on their mortgages for several years which has blunted the squeeze of higher interest payments on existing debts, however, there is a squeeze on auto loans and other non-secured debts but these are smaller relatively speaking. The bottom line is that impact of rising rates on inflation is complicated as there are offsetting factors.  If you look at anytime there was an inflation problem in any country it was mainly rooted in problems with the supply side of the equation. Demand for goods and services is generally steady and inelastic. We all need a consistent amount of food, shelter and energy, but the supply of these things are not always steady. Supply disruptions/shortages can happen for a number of reasons such as forces of nature (i.e. bad weather), political (such as embargos and nationalizations) and pandemics. Raising interest rates will do fuck all to stop the impact of a supply shock, if anything, it may exacerbate it as will be prohibitive to the financing of expanding supply which would be badly needed. We had a supply side shock in the form of a pandemic and now that the shock is normalizing inflation has come down with it, yet everyone is giving credit to the Fed for this. Bullishit. They might actually be hindering the disinflation.  I was right when I wrote last year that the Fed is like Inspector Gadget. But I digress....

Back to the markets.  NAAIM sentiment dropped to 34 on August 24th which was the lowest reading of the year.. That's quite a running for the hills for just a 5% pullback.  It did bounce back to 61 last week but that 34 reading  ticks the box for being at an extreme where solid, Intermediate term lows tend to be made. There have also been pretty notable equity fund outflows for the past 4 weeks totalling about $30 Billion  and  put/call ratios continue to be elevated and have been high enough to suggest an intermediate term low has been reached.. All in all, it didn't take much of a decline for  people to run for the exists and that's the kind of behavior you want to see if you're banking on the recent decline being a healthy bull market correction. Hedge fund positioning has backed off but I would like to see it back off a bit more, so it's not an all clear just yet. Am I being too cute? I could be.  It's a bit tricky now to call the ST. The easy money of the bounce has been made and of this bull run YTD as well.  I can see the market going either way from here this month but if we go higher it probably would not lead to a new leg higher. I still believe the likely path of the market for the next 1-3 months is sideways with the possibility of a slightly lower low. As usual, my outlook will adjust as things unfold. 

A couple of weeks back when NVIDA announced earnings after the close, I took a look at the messages being posted on the stocktwits message board.  Despite the fact that the company reported blow-out numbers, the vast majority of the messages posted were bearish.  It seems people were betting or hoping the stock would go down. Many people are calling NVIDA a bubble stock, yet you wouldn't see this kind of bearish posting back in the heyday of the tech bubble of the late 90s. You  would have seen everyone cheering and pumping the stock. Back then bears were an endangered species whereas now they are a dime a dozen. I'm not on expert of NVDA and I know the stock is not cheap using conventional valuation metrics but what I do know is that there is a bearish undertone to this market which has been in place for the most part since 2009. If you've been reading this blog over the years (I'm not even sure if anyone actually does) you will know that I have used the term permabear trading community to describe a large portion, if not the majority, of traders out there.  These folks became jaded and skeptics because of the crashes of 2000 and/or 2008 and I bet a good number of those who were posting bearish messages on NVIDA were tech bulls in 2000 lol.  When most people first start trading/investing they are inherently bullish looking to buy stocks they believe will go up. Very few, if any, start their foray into the markets as bears always on the look out for what could go wrong rather than what could go right. 

During the market recovery of 2020 we saw the rise of newly minted young traders who piled into speculative tech, crypto and meme stocks. Now after getting burned, they too have probably joined the ranks of the permabear trading community while some are still delusional. I have a friend of mine who is also an experienced advisor.  He got balls deep into  the meme stock fever. He, like all other holders of AMC  was convinced that there was going to be a short squeeze of epic proportions and every time a rally would fall part he would blame it on manipulation by the powers that be and his negativity has coloured his outlook on the markets in general.  Anytime he discussed AMC with me and the grand conspiracies surrounding it  I didn't even bother trying to challenge him as there was no use. I would just nod along and wish him all the best. Now that AMC has been  decimated these past few weeks I'm sure he's more bitter than ever. We've been planning to meet up for some time and so I guess I'll know soon. 

Give it time and keep an open mind

I've been warning since mid July about the market getting overheated and now low and behold we've see the SPX drop about 5% from the recent peak. Rising bond yields appear to be the main culprit which I also warmed about. So now what?  Has the froth I warned about been unwound? Well, a good chunk of it has.  Put/call ratios have soared, NAAIM exposure is back to 60%., AAII sentiment is 1:1 bulls vs bears, Fear/Greed index back to 45 and the market is a quite oversold on a ST basis as per McClennan Oscillator.  Thus, there's  enough evidence to suggest a ST bounce is immanent but I suspect that if we get one, it won't signal the end of this corrective phase that we are in. I suspect at best the market goes sideways until end of October - mid November. A bounce followed by a lower low at some point is probably the more likely scenario but like I've always said, be careful trying to predict every wiggle in the market because it's often a fool's game. I will defer to the indicators. Right now they are oversold enough for a ST low to be immanent but they would need to be more oversold in order to provide a high conviction, longer term bottom signal. We're talking about AAII bears outnumbering bulls 2:1, NAAIM at sub 40 and Fear/Greed at sub 25. There's no guarantee of course that we will get these readings before hitting a low - the market may find a low well  before or well after such readings are hit. 

The Jackson hole speech this Friday will likely be a market mover. There's no denying the sell-off in LT bonds is hamstringing the market. I noticed a large outflow in TLT last week and it appears to be quite oversold as well at it re-tests the October low. So what's behind this bond rout? LT yields are theoretically supposed to reflect the average of what ST rates are expected to be over the duration of the bond plus a maturity premium. It's obviously not that simple as there are  buying and selling of government bonds as the result of changing needs/circumstances of its various holders in particular, the big boys which are foreign centrals banks like China and China has been selling US bonds significantly as of late. Of course, for every seller is a buyer, but as with any asset, if sellers are more urgent to sell than buyers are to buy at a given price, the clearing price will drop accordingly.  Despite the bond rout,  5 year break even spreads of TIPs have hardily budged and continue  to be subdued, hovering around 2.2% which suggests this rout does not appear to be driven by a repricing of higher inflation expectations which would truly lead to a higher for for longer Fed funds. Fed fund futures pricing also confirms this.

Bottom line is that although there's been a good amount of froth unwound in the market and a good bounce can materialize soon, I wouldn't get too excited about the prospects of the market until perhaps sometime in the fall. Could this be the start of something more than just a bull market correction? Of course, and we need to give that some consideration but as of now I don't see that being the case. If we see lot of people buying the dip and other signs of complacency that would make me change my mind.   

Wait and see

Some interesting things have happened since my last post. We had Fitch downgrade US debt and some notable bears like Mike Wilson from Morgan Stanley threw in the towel. As far as the debt downgrade goes, it's still clear to me that there's a continued misconception about the nature of government debt. Seems like these rating agencies didn't learn anything from S&P's downgrade in 2011...meanwhile these are the same jokers who slapped AAA ratings on subprime MBS. Wrong in both cases.  Unlike you or me, a  sovereign currency issuer like the US has the ability to literally print as much currency as it wants to pay its debts. If they held debt in another currency, that's another issue. But as we've seen earlier this year and in prior years, the US places a self-imposed constraint with the debt ceiling which ends up being an excuse for political gamesmanship So yes, technically the US can default but only if they deicide to shoot themselves in the head. As idiotic as many politicians are, they know that the consequences of a default are to be avoided and so it always will be.

Some of the extreme bearish positioning that has underpinned this bull run since October has been unwound along with a few bearish strategists  throwing in the towel for their recession calls in 2023. These developments are only natural after such a bullish move in the market. What we need to ask ourselves is have we used up all of the bear fuel? I don't believe we have from a longer term point of view but the ST does appear to be sketchy. I've seen quite a turnaround in the positioning in  hedge funds types to moderately overheated levels. These would appear to be trend following, CTA type funds whom I would classify as weak longs as they would no doubt bail once the momentum turns against them.  But if you look at the overall positioning crowd there is still plenty of fuel in the tank as there are plenty who position based upon their perceived notion of fundamentals and there's still plenty of skittish folks. Those bears who have capitulated are not exactly bullish, they are just admitting they were wrong with their timing. They still think recession risks are elevated for 2024 and are only grudgingly accepting the chance of a favorable outcome, but they want to see more proof. One of these capitulated bears is Morgan Stanley's Mike Wilson. I read this morning how he acknowledged strong fiscal spending as a supporter of the economy as part of the reason why his recession call did not come into fruition. He, like pretty much everyone else, was instead fixated on monetary policy. Maybe Mike finally discovered my blog lol  I've said it here more than once that robust deficit spending was supportive for the economy. Morgan Stanley wants to see "a broader swatch of economic indicators" turn up including  rate cuts before being comfortable with the economy being in an upturn. Again, as I've said ad nauseum, if you wait for the all clear before jumping back in, you will end up having to buy at all time highs and at that point, you will probably hesitate again to buy because prices and valuations will appear high - I'm already seeing plenty of people complaining about valuations now.  

Despite  a ST  overheated market, there's still ample fuel left for this bull run. Rising bond yields are not equities friendly and at some point will likely matter, but anything could be trigger for a correction/  consolidation. Bonds have hurt both bulls and bears this year. Coming into this year bulls figured the Fed was pretty much done and so even if rates just stayed on hold a sideways market for high quality bonds would yield a 5%+ annual return.  Meanwhile, most bears were penciling in a recession and therefore immanent rate cuts which meant bonds would be a source of  strong capital gains. Some of the bears who I follow on twitter openly mentioned a few months ago how they were long bonds and one guy was also short stocks too. Other bears I saw last year  got long vol as a way to express their bearish views which was a disaster of a trade. All these fintwit bears got slaughtered and I haven't heard a peep from them in about 2 months. Maybe this suggests the bears are due for a reprieve.  July CPI gets released in a few days which is typically a ST market mover. If it's market friendly do not be surprised if we get another run for the highs before the market finally rug pulls later on in the month  or in September. All of this is just guesswork of course and I don't like to fixate on the very ST which is usually too random to call. But the bottom line is that in the ST (1- 3 months), it's not a  good risk/reward set up on the long side.  

The one indicator that sums up where I think we are in this cycle longer term is the BOA bull bear indicator. It hit the max buy zone of 0 in mid June and hovered around there for several weeks. It currently stands at 4.1. In the past, anytime it hit 0 and rose from the ashes, it signaled a new bull cycle which was not in danger of a top or major decline until it rose to  8. This does not means corrections of 5-10% can't occur in the interim. I'm not necessarily expecting that deep of a correction...we'll see. The other thing that makes me believe we are perhaps in the mid innings of this run is the lack of IPOs. I read today how IPO issuance in Canada has been very weak, on pace to being the worst year on record. IPO weakness is also the case globally. Major market tops tend to-coincide with IPO frenzies and right now it's still in the doldrums close to where you see major bottoms not highs. That can change quickly of course but until it does, the bull run would appear to have ample fuel in the tank to go higher longer term as we continue the unwind of  pessimism/cautiousness  to optimism/complacency.