The Power of Triple Witching

Everyone has blamed the selloff on a hawkish Fed even though they went through with another 25 bps rate cut.  If you look at the price action, it seems to make sense, but then you look at the elephant in the room, that no one notices.  Its the options market, and in particular the SPX, which controls a huge amount of the the market's total notional exposure.  This is especially pronounced during the 4 quarterly expirations coinciding with the futures expiration, well known as triple witching expiration.  The hedging and systematic positions that get built up are disproportionately focused on those 4 expirations in March, June, September, and December.  Of the 4, December is by far the biggest, which can often lead to large outsized moves around the quarterly expirations, when they are unexpected.  

Coming into the FOMC meeting last week, the market was grinding lower slow, but with very little volatility.  And with FOMC meeting days having a bullish bias all year, it appears a lot of hedgers decided to delay their annual rollover of put buys/calls sells for 2025 into the latter part of last week, after the FOMC.  Also a lot of fast money momentum traders were probably looking to exit late last week after what they thought would be the start of the Santa Claus rally.  Well when you have an elephant (SPX hedgers) try to exit along with a bunch of fast money bulls at the same time, you can get violent down moves like you saw last Wednesday.  

Last week's move doesn't change my outlook at all for 2025.  These sudden sharp drops are just a symptom of a market that is saturated with long positions, with few discretionary traders left to buy when there is a dip.  The vol control funds had gotten back to near max long positioning.  The biggest trend following ETF, DBMF, increased their SPX positioning to the largest of the year.  At last check, they are holding a $556 million long position in SPX futures, with a total net asset value of $1,237 million.  They are nearly 50 percent long their fund in SPX.  Not to mention they are long over $200 million in MSCI and MSCI emerging market futures, making them net long 62% equity index futures. That is a huge long position for them.  All of the systematic funds were back in the pool as of early last week.  It may be a different picture today, but I doubt it.  It takes most of these trading systems several weeks to go from net long to neutral, and a few weeks more to go from neutral to net short.  

Was it a coincidence that once the SPX quarterly options expired on Friday AM at the open, the market shot up over 100 points?  The CNBC Fast money crowd will credit the PCE and whatever Fed talk happened that day with the move, but it looks like the options market was a huge driver of the price action from Wednesday to Friday.  

The force that options are having in this market reminds me a lot of 2021, when you had rampant speculation in short term calls.  Just like the past 2 monthly options expirations, you had lots of selling around the options expiry.  A lot of it due to call selling from the speculators who don't have the funds to exercise their ITM options, thus being forced to sell before they expire.  You see a big drop in the open interest after these expirations, and with much more call activity than put activity, it leads to a lot of net deltas that come off the dealer's books, forcing them to sell their longs which they used to hedge their short call positions.  These options dynamics are a symptom of call options speculation run amok.  

By last Thursday, you did finally see the put activity increase as investors go nervous and the volatility increased.  The ISEE index plunged on Thursday and Friday, back to levels not seen since the Monday ahead of the 2024 election.  

While we don't have the COT data from Wednesday to Friday, we did see asset managers reduce their net long positions, although small specs remained heavy long. 

I would assume that the asset managers pared back a lot more of their long positions into the weakness from Wed. to Fri., as they are usually trend followers.  We'll know for sure in next week's COT report.  

Given the intense selling and prices getting close to 5800-5850 strong support, I did some buying of SPX on Thursday and Friday.  With the exaggerated moves due to opex and time-sensitive sellers last week, I expect that to setup for a Santa Claus rally this week.  We already saw part of that start on Friday as soon as those SPX AM options expired.  Looking for a further rally as we enter a very seasonally positive part of the year, along with big capital gains held by most investors.  These investors will likely to be very reluctant to sell for the remainder of the year, in order to delay their capital gains tax hit for 1 more year.  It probably means that whatever selling that was delayed for tax reasons will likely hit the market hard in early January.  

Big picture, I remain bearish on stocks, as there are numerous signs of long positioning being saturated, and with asset managers unwilling or unable to increase their net long positions much further from here.  Volume will go down a lot this week, and low volume markets usually favor the long side.  The urgent sellers did their selling late last week, so that should give room for a healthy bounce this week, to potential resistance around 6050-6090. 

Nasdaq is the Leader

The Nasdaq massively outperformed both the SPX and the Russell 2000 last week.  On Twitter, it seems like the paper napkin technicians are suddenly concerned about the weakening breadth out there.  In the distant past, until 2018, breadth was a good predictor of future broader market weakness.  You would see breadth weaken as the market grinded higher, and that would be a reliable signal of an impending pullback.  But things have changed since 2018.  Weak breadth no longer provides a reliable signal.  

Instead, it is strong breadth, with Russell 2000 outperformance, which has become a more reliable signal of an impending pullback.  Russell 2000 has become a barometer of investor exuberance.  Whenever investors feel super bullish, they gravitate towards the more speculative Russell 2000 for the extra juice.  The surge higher in Russell 2000 as the Nasdaq 100 lagged the SPX and Russell 2000 foreshadowed the local top in July.

Nasdaq 100/Russell 2000 Price Ratio

As you can see in the ratio chart above, the QQQ/IWM ratio topped out a few days before the SPX made its top in mid July and early September.  Those happen to be the only 200+ point pullbacks in the past 6 months. 

When the Nasdaq is outperforming the SPX, it is usually bullish for the market.  When the Nasdaq is lagging, it is usually bearish for the market.  What you saw in October and November is an anomaly.  The Nasdaq was noticeably lagging the SPX during that time and the market kept going higher.  You can credit the Trump hype effect for that phenomena.   Investors incorrectly viewed a Trump presidency as being bearish for tech stocks, and bullish for small caps.  Fast money piled into small caps after the Trump win, only to sell when they realized that there were no greater fools willing to pay a higher price for small caps.  Small caps are merely trading vehicles, not something that investors believe in for a long term investment.  They have underperformed large caps because their earnings have underperformed.  The Russell 2000 is merely a sideshow.  The total market cap of the Russell 2000 is about the same as the market cap of AAPL.  That shows you how insignificant the Russell 2000 is to the big picture.  

So the very mild pullback last week is actually a bullish short term sign, with Nasdaq 100 regaining its leadership.  Remember, investors are not going to pay nosebleed valuations for financials, utilities, and other so-called benefactors of the Trump trade.  Those sectors can only go up so much before they flatten out.  You don't get investors excited about momentum building up in low growth names.  You need to see the momentum in mega cap tech and high beta tech to pump the SPX to even more nosebleed valuations.  Investors are willing to pay sky high prices for tech stocks if they are going higher.  They are not willing to pay sky high prices for other, more boring sectors.  

Longer term, the highly concentrated rally focused on tech stocks is a sign of a weakening economy.  But shorter term, its a bullish sign that we're still not at the top of this bull market.  In an interview with the Interactive Brokers CEO last week, he noted the following:  

You can see that over 70% of trading volume is in Mag 7 stocks.  And outside of that, its mostly crypto related companies and cryptos.  That tells you where the individual investors are putting their money.  They are almost all in on high beta and spec names.  Very reminiscent of late 1999 and 2000, but that's a story for another day.  

You will not see real pain in the overall stock market until you see Nasdaq 100 really underperform.  The US economy is now extremely financialized.  With the heavy allocation to equities among households, and in particular megacap tech, a Nasdaq 100 bear market would cause a reverse wealth effect, slowing consumer spending, leading to an economic slowdown.  That's not something on many investors' bingo cards for 2025 and 2026. 

Not much movement in the CFTC COT positioning for the major stock indices, with asset managers and small speculators remaining heavily long.  You continue to see lots of call buying on the ISE.  There is a lot of options speculation in individual names, in particular TSLA.  With just 2 weeks till the end of the year, I would expect the recent big gainers to hold their gains as many investors will want to delay capitals gains into 2025.  That is also part of the reason that you are seeing Russell 2000 underperform, as many small caps are tax loss candidates. 

While the Nasdaq 100 strength was a bullish factor last week, the suddenly weak bond market and rise in yields was a bearish factor.  If you consider both, the current situation is about neutral.  I did cover some of my shorts on Friday, and now only hold a very small short position which I will likely close out today.  With volatility staying low even during last week's pullback, that is a good sign for the bulls.  A market that doesn't want to selloff much even with such bullish positioning makes it tough to stay short for long.  Just a 1% pullback, and even that's been a struggle to get for the bears.  On the short side, you have to take your points when they come and not get greedy.  The pullback started last Monday, so its on day 6.  I doubt the market can go down much more this week before bouncing again.

I don't see much edge at current levels, with bullish seasonal factors about to really kick in as we get closer to Christmas.  The opex forces from triple witching coming up this Friday could induce a bit of volatility as institutions do some last minute position squaring and year end hedging before the holidays.  But its not worth betting on much movement this time of year.  The complacency and lack of fear, high amounts of call buying, and heavy bullish positioning are potentially bearish elements.  But its been that way since the election, and still we grind higher.  Nothing compelling here, although if we do get a further move down towards SPX 6000 this week, it could be worth a small long play to ride the seasonal tailwinds. 

Trump Mania

Just when you thought things couldn't get crazier than 2021, they are getting crazier.  Compared to 2021, the breadth of the insanity is less, but the intensity is greater.  From late 2020 to late 2021, you had a speculative surge that included graded sports cards, pie in the sky NFTs, hundreds of worthless SPACs, meme stocks, and lots of tech stocks.  In 2024, you started with the AI mania, which is still ongoing, but the fast money speculators are now migrating to the Trump mania, with Trump meme stocks like TSLA and PLTR leading the pack with bitcoin and its related names like MSTR and COIN.  

You have fewer stocks participating in this speculative bubble, mainly because a lot of newbies got burned the first time around in 2021, and don't have the stimmies or the income to buy up the flavors of the day this time around.  The survivors of the 2021 bubble popping are wealthier, more selective in their speculations, but still very reckless and fearless.  2022 wasn't painful enough, and was too short of a bear market to discourage these hogs from chasing momentum.  That's why you are seeing such a quick comeback to now form a second bubble, just 3 years after the previous one popped.  It's probably the first time in financial history that you have one bubble emerge so quickly after the previous one popped in the same asset class. 

The 2021 bubble was about trillions of dollars of fiscal stimulus liquidity sloshing around looking for a home.  The 2024 bubble is about US superiority, capped off with a Trump election victory, where almost everyone believes that the US has the best economy, and that US stocks are the best investment.  The European and Asian stock indices have lagged the SPX badly this year, especially since April.  The 2 biggest manias that we've seen this year, AI and Trump, are based in the US.  You can only play both manias through US stocks.  For AI, its basically NVDA, and a few tertiary names like AVGO, DELL, etc.  For Trump, its TSLA, PLTR, bitcoin, and bitcoin related stocks.  Sure you have some quantum computing names going crazy recently, but those are all small cap names, and a drop in the ocean compared to the AI and Trump related names.  

Investors are moving their money in response to what they believe is US superiority.  The inflows into US equity ETFs and mutual funds are the greatest in history.  As a percentage of market cap, they are higher than anytime since 2000, including 2021.  

The highest ratio of calls to put in the ISE since it started in 2006.  The demand for put protection and bearish bets is historically low.  

Despite this lopsided buying of calls over puts, the SKEW index is showing out of the money puts as being historically rich vs. out of the money calls.  In fact, the SKEW hit its highest level in history last week.  In the past, high SKEW readings have portended corrections in the SPX. 

The ominous signs just keep piling up.  If history is our guide, 2025 should be a massive inflection point, which will catch many investors off guard.  Those are the moments where those who can look at the big picture will thrive.  

When will this mania for US stocks end?  It ends when the perception of a Trump presidency being bullish for the US economy and US stocks is broken.  That could take several months into his term.  The hype is greater than the substance.  People are talking about deregulation and tax cuts but those are vague, and even if concrete steps are announced, the firepower will be limited.  It won't be enough to overcome less immigration, tariffs, and possibly less government spending (due to DOGE, blocking Biden stimmy spending, etc.).  Tax exemptions on tips or overtime is a drop in the bucket.  Corporate tax rates are already low at 21%, lowering to 15% won't do much, and it may be hard to pass as its not something that's very popular among the public. 

If there is no noticeable improvement in the US economy by the 2nd half of 2025, then you could see an exodus like you've never seen before in such a big asset class.  A lot of the recent inflows into US stocks are coming from foreign countries, so they will have less tolerance for pain, especially if the US dollar weakens along with the SPX.  A lot of FOMO money is rushing it.  At the highest valuations in history.  Resulting in the highest US household allocation to equities in history.  There is a lot of hot money betting on this thing to continue.  This isn't long term money being put in.  Its fast money looking for fast returns.  They'll run for the exits if things go downhill.  

Don't expect much movement for the next 3 weeks, investors will be looking to delay capital gains into 2025, which should push out a lot of potential selling into January.  At the same time, market looks overextended short term and overexuberant.  There should be some systematic year end hedging coming in the next 2 weeks as December is the biggest hedging month for SPX options.  Above average amounts of OTM call options sales / put option buys are likely to be initiated.  Still holding a small short in SPX which I am stuck in.  With the bond market suddenly looking stronger, not expecting heavy selling, so I'll look to exit sometime on any mild pullback within the next 10 days, to re-enter sometime at the end of the year or early next year. 

Greater Fool Theory

Investors are not oblivious to valuations.  They just put less importance on valuations when markets are either 1) in a bubble 2) in a crash.  During a bubble, investors don't care that markets are overvalued because prices keep going up and they continue to make money.  During a crash, investors don't care that markets are undervalued because prices keep going down and they continue to lose money.  

Market conditions where investors ignore fundamentals are not stable.  I.e., those conditions do not last for long.  In bubbles, the greater fool theory is hard at work, as investors believe that someone else will buy their stocks at higher prices, sometime in the not too distant future regardless of valuations. 

The crowd is not stupid.  They can easily figure out that stock valuations are high.  Its out there in clear view.  In fact, many will admit that the market is overvalued.  But they believe that the market will stay overvalued and go up anyway.  That is what defines bubble psychology.

Fundamental value becomes less important.  Price momentum becomes more important.  A survey of individual investors done by the Yale School of Management shows the following results over the past 25 years.  

Proximity to Platonic Ideal of 100% Believe Overvalued, 100% Believe Market Up Next Year

The underlying belief that arises from bubbles is that investors think that prices will rise in the short term, regardless of what they think about the long term.  Investors have high conviction that prices will rise in the short term, but they also know that eventually the party ends, so they are not as positive about prices going up in the long term.  Short term positive, long term neutral to negative.  The stock market tends to do much better in the long term when investors are short term negative, and long term positive.  

It is this greater fool theory which makes investors' time horizons shorter.  It also causes investors to chase after high beta, volatile, and rising stocks.  MSTR is a perfect example of the type of stock that comes into favor near the peak of a bubble.  Boring, slow moving stocks are ignored.  When people see others making all this money in bitcoin and related stocks, big cap tech stocks just don't have the same appeal. 

In this bubble environment, put protection is an afterthought, and considered a waste of money.  Call volume rises and put volume falls.  In the options market, more and more evidence is building that investors are leaning very heavily towards calls over puts.  Individual stock put/call skew in S&P 500 stocks shows heavy bullish positioning.  

Conference Board survey of consumers shows record levels of optimism towards stocks, with 56.4% expecting stock prices to be higher in one year.  

No one knows when the party ends.  But when you see so many signs of highly bullish positioning, pervasive optimism, and an extended uptrend at historically very high valuations, usually there isn't much time left.  The long term risk/reward for long positions is quite poor.  On the other side, it presents an opportunity for great risk/reward for long term short positions.  These parabolic moves due to short squeezes, speculative fever, or just plain FOMO are hallmarks of a bubble market.  They always end with long term down trends.  Over the coming weeks, as we get closer to year end, I will look to put on some long term shorts in individual stocks which I can see go down 60-80% over the next 2 years.  

We got another move to an all time high in the low liquidity, low volume Black Friday session.  It looks overextended in the short term, so have put on a starter short position. Not looking for anything big here, something around a pullback of 3%.  The bonds have been acting strong lately as Treasuries catch a bid with European bonds trading higher over the past several days.  This will help limit any downside for stocks this month, along with positive year end seasonal forces, so wouldn't get aggressively short.  The time to look for bigger down moves will be early 2025, so keeping a lot of powder dry until then. 

Speculative Fever

In the late stages of a bull market, the fear of missing out is greater than the fear of losing.  FOMO happens when your friends and neighbors are making money and you are not.  People don't live in a vacuum, they notice what others are doing, whether they are doing well or not.  Envy is a great motivator for investors to do things that they would otherwise not do.  Rationality goes out the window in these environments.  That is when you see parabolic moves.  Speculative waves go from one sector to another.  The hottest sector among speculators was AI in the spring and summer of this year, with NVDA, SMCI, AVGO, DELL, and TSM blasting higher.  The speculators' baton is now being passed from AI to Bitcoin. 

Exhibit A:  MSTR/Bitcoin.  This is at the heart of the speculative bubble that is happening right now.  When you see massive short squeezes and irrational price moves that defy the fundamentals, you are near the peak of the mania.  After the crazy squeeze this month, the market capitalization of MSTR stock is now over 3 times the value of the Bitcoin on its balance sheet.  MSTR's non-bitcoin related business is meaningless compared to its bitcoin holdings.  This reminds me of the 3COM/Palm spinoff during the dotcom bubble, where Palm was valued way more than the Palm holdings of 3Com, considering that 3COM stock holders owned a huge chunk of Palm.  It was one of those cloudy arbitrage situations where rampant speculation led to a supply/demand mismatch that overwhelmed the arbitrageurs' capital and willingness to hold the long 3COM, short Palm position.  The same is happening with the arbitrageurs' willingness and capital to hold the long Bitcoin/short MSTR position.  IBIT, the biggest Bitcoin ETF, is up 43% over the past 6 months, compared to 150% for MSTR.  As recently as September, the returns were equal for IBIT vs MSTR. 

Exhibit B:  TSLA.  TSLA is a $1.2 trillion company that is trading like a Trump meme stock.  It is one thing to have a small cap trade like this.  It is another thing to have a trillion dollar company gaining 65% in a month based on hopes that a Trump administration will slash all transportation regulations and allow TSLA to do whatever it wants with full self driving and autonomous vehicles.  Never mind that TSLA full self driving is not ready for prime time and requires the driver to hold the steering wheel and be alert at all times.  The dreams of Robotaxis roaming the roads has clouded any kind of judgment on the stock.  Reality is not on anyone's mind.  Its a speculative frenzy that is only taking a backseat to the Bitcoin mania.   

 

Exhibit C:  QUBT/IONQ.  Quantum computing is suddenly a big thing among speculators.  It had its 15 minutes of fame back in 2021 along with various other themes, but this one is running super hot recently.  Never mind that these 2 companies, in particular QUBT, are basically just prototype companies that are more interested in pumping up the stock and selling shares to the public than actually running a profitable long term business.  

Its a speculative frenzy out there.  The current environment rhymes with 2000 and 2021, but 2024 is more focused on certain themes and less broad based.  Just like 2000 and 2021, investors are heavily loaded up with equities with few worries about the economy or the stock market.  Valuations now are historically in the 99th percentile, just like 2000 and 2021.  From a seasonal perspective, the end of year in a big up year like 2024 is usually strong.  You rarely get big pullbacks during the holiday season after such huge gains, with long term investors incentivized to delay stock sales into 2025 to push out capital gains taxes to 2026.  Seasonally, this is a bullish time of year, although most of the bullishness happens around the last 10 days of November and the last 10 days of the year.  

The ISEE options data shows heavy call buying for much of 2024, higher than 2021 when complacency and speculation was very high.  Call options speculation is overwhelming any kind of demand for put protection, causing the put/call ratios to plummet. 

 

The COT data as of Tuesday, November 19, when SPX closed at 5917, shows non-dealers buying the dip, reinforcing their complacent positioning.  Usually asset managers are reducing net longs into selloffs, but not this time.  Its almost as if everyone knows that all dips are to be bought, not sold.  Only suckers sell on dips.  SPX asset manager net longs is at the highest levels since early 2020, and around the highest levels of the past 10 years.  Other times when we've reached this level of asset manager net longs and dealer net shorts, was in early 2018, early 2020, and now.  We had a huge selloff after the blowoff top in January 2018, where SPX dropped 11% from the highs.  We all know what happened after the top in early 2020, and now we're in a similar point with regards to positioning.  Seeing similar extremes in net longs among asset managers in Russell 2000 futures, reinforcing the overall bullish positioning out there. 

SPX COT Positions

Russell 2000 COT Positions

 

 

 

The ratio of leveraged long vs leveraged short ETF assets is now at a 3 year high, last time being above 12 in December of 2021.  That just happened to be the top of the market right before the start of the 2022 bear market.  

 

Still holding a small long position that I didn't exit gracefully after the post election moves up and down.  I will be selling the remaining long today and watch and wait to look for a short entry.  Despite the positive seasonal influence on the market, I see an opportunity to put on shorts to play for a pullback in the coming weeks.  The way the market just dropped on just a hint of less Fed easing from Powell and some overblown nuclear war fears after Russia's threats show that long positioning is quite saturated.  With VIX back around 15, the positive influence of reduced vol on equities will be limited.  Upside should be capped around SPX 6025 and downside on a pullback could take it to SPX 5800.  Based on last week's price action, you are not getting the same reflexive buying pressure on dips like you did earlier in the year.  Its a sign that positioning is stretched and there are not many buyers waiting to get in. 

Getting a gap up based on optimism that Trump's Treasury pick, Scott Bessent, will be positive for the stock and bond market.  I disagree, considering how little power the Treasury has compared to what Powell can do for the next year and a half to spoil Trump's party.  Trump, not Bessent will be making the final calls on tariffs and spending plans/tax cuts.  Back in Trump's first term, Mnuchin was basically a Trump lackey, doing whatever he was told.  That's why he lasted so long in the Adminstration, unlike others who actually had a backbone.  Bessent either becomes Trump's lackey or he gets fired.  That simple. 

Powell will be incentivized to play for legacy and be hawkish on his way out, so don't expect any dovish gifts for the next several months unless the economy really craters.  More and more, the non-consensus trade of a weaker US economy vs the past year is coming into view, as any focus on cutting government spending, raising tariffs, reducing immigration, and reducing the deficit will not be a positive for the US economy.  Of course, in the heat of the moment, speculators only see dollar signs ahead, and have blinders on.  This blind optimism phase doesn't last long, especially when everyone is already loaded up long. 

Topping Process Begins

"Bull markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria.” - Sir John Templeton 

2022 was pessimism.  2023 was skepticism.  2024 is optimism, now bordering on euphoria.  You are seeing euphoria in the parabolic price action in high beta Trump trade risk assets like bitcoin and TSLA.  Investors got euphoric on NVDA this past May/June and are still very bullish on the name.  The ingredients are there are for a durable, long lasting top.  Since the election, investors got high on the Trump win but are now experiencing a hangover.  

The post election move from Nov. 6 to Nov. 11 has been completely taken down, just as quickly as it was taken up.  It catches my attention when all the bullish talk on Twitter, CNBC, and Bloomberg doesn't match the price action.  Investors can't seem to imagine a world where the Trump led US economy disappoints.  You are seeing that with bond yields grinding higher and higher.  It appears the supply/demand fundamentals are just too poor in US Treasuries to get a sustained rally even with Fed rate cuts.  A fundamentally weak bond market due to excessive deficit spending and inflation that is sticky above 2%.  That bond market weakness eventually catches with the stock market. 

From past experience trading tops in SPX, they are a process.  Greed is a less intense emotion than fear, but greed lasts longer.  Bull markets usually don't end with a defined blowoff top, but end with a choppy consolidation that can last for a few months.  During the topping process, optimism slowly fades even while prices stay high.  That sets up the trap door when the crowd slowly head to the exits which eventually suddenly turns into a stampede leading to a waterfall decline.  

This post election price action has revealed the boundaries for the upside and downside for the next few months.  The upside should be capped around 6050-6150, with the downside capped around 5700-5800.   Range traders will be able to play both sides for the next few months, selling the upper part of the range, and buying the lower part of the range.  For this strategy, I prefer the short side, just because of the topping process and trap door risk with the very large net long positioning.  At least for the next 3 months, the probability of a waterfall decline (+10% down move in a short period) are low enough that you could probably play the long side as well with decent risk/reward.  

It has been hell for countertrend traders in 2024.  These one way bull trends with high net equity exposure among fund managers and retail investors set up the conditions for a bear market.  We saw this happen in late 2021, where high equity exposures led to a very weak market over the next 12 months.  The catalyst for the selloff in 2022 was the Fed rapidly raising rates to slow down inflation, causing a bond market panic which led to a bear market in stocks.  The downside catalyst this time seems less clear.  If I had to guess, it would be that US growth disappoints, and earnings fail to meet expectations.  With these kind of high net equity positioning, it doesn't take much to catalyze a big drop. 

The COT data for SPX futures as of Tuesday, Nov. 12 shows asset managers hitting new 52 week highs in net long positioning, joined by the small speculators who are also the most net long over the past year.  On the other side of the coin, dealers are now massively short, biggest net short in the past 10 years.  This is about as bearish of a long term setup that you will see. 

SPX COT

Russell 2000 futures also show extended net long positioning among asset managers, adding another bearish piece to the puzzle. 

Russell 2000 COT

The bond market remains weak amidst potential inflation concerns from a Trump economy.  A less dovish Powell on Thursday stating that rates could be normalized slowly added to the weakness.  Its not a great environment for either stocks or bonds here.  In the short term, I would rather be long stocks, but in the long term, I would rather be long bonds. 

The trend is still up in the SPX, but the price action is not as bullish as you would expect considering the widespread optimism on Wall St.  WSJ articles like this are another warning sign:  

"U.S. equity exchange-traded and mutual funds drew nearly $56 billion in the week ended Wednesday, the second-largest weekly haul in records going back to 2008, according to EPFR data. Such funds have drawn inflows for seven consecutive months, the longest streak since 2021,"

Those kind of heavy ETF inflows after a huge move higher are tell tale signs of late bull market FOMO among investors.  Valuation expansion has been the main driver of this bull market, as earnings can't keep up with the pace of increase in SPX prices.  This is 1999-2000 type FOMO.  Now you just need to see volatile, choppy price action to confirm that a top is being made.  

Missed the exit on the partial long SPX position that I have.  I'll hold for bit longer before selling.  Will be looking to put on a short on the next bounce, if it takes SPX above 6000.  I see limited upside above 6000 this year, so good risk/reward to put on shorts at those levels. 

Debt Treadmill to Hell

Its sad seeing what the US government has become.  Not only have they embarked on horrible long term fiscal policy.  But they've also created a market that makes it harder to trade bonds.  It eliminates a liquid, versatile weapon available in the trading arsenal.  The long bond trade.  Bonds used to have an asymmetric payoff profile.  The downside was limited, because inflation was contained, but the upside was more open ended due to recession risk and an overactive Fed.  That asymmetric payoff is now gone.  The payoff profile is now more balanced, with inflation risk now just as high, if not even higher than recession risk.  Add to that the poor supply/demand fundamentals in the Treasury market with lots of supply coming from the huge deficits and less demand coming from creditor nations like China. 

When fiscal deficits and inflation were much lower, trading from the long side in bonds was both forgiving and high probability.  The long term trend was towards lower yields, and you rarely had extended down moves.  Bonds had much lower volatility than stocks, making the bond's risk adjusted return far superior to that of stocks.  Also, during that time, the yield curve was quite steep, making the long side a positive carry trade.  Treasury yields could go up a bit and you could still make money on the long side because of that positive carry. 

2020 created a sea change in the bond market.  With the enormous Covid fiscal stimulus in 2020 and 2021, the fiscal budget blew out and inflation came roaring back.  At first, bond traders couldn't believe what was happening, and remained skeptical about the ability for the US economy to stay strong with high interest rates.  That's why the SOFR curve has continuously priced in many more rate cuts than have actually happened.  Its why the yield curve was so inverted, and remained that way for so long.  Its because the majority of bond investors expected the Fed to normalize rates (cutting them to neutral) much more quickly than they have.  

Of course, the rate cuts this fall, which have come much later than many expected, are too little too late for bond investors.  To add insult to injury, you have seen the biggest 10 year yield increase ever following the first rate cut of the cycle.  Its been hell for bond investors for the last 3 years.  It is the exact opposite of how bond investors felt for the 10 years prior to 2021.  Instead of having both positive carry (upsloping yield curve) and yields trending lower, you have negative carry (inverted yield curve) and yields trending higher.  A bearish double whammy.  Levered longs in the bond market have gotten killed. 

The golden days for the bond investor are over.  The cat is out of the bag.  There is no turning back when you embark on permanently high fiscal deficits to keep the economy out of recession.  It is no longer politically or monetarily feasible to get back to low fiscal deficits with this amount of national debt.  The interest on the debt itself is so enormous that its a vicious cycle of issuing more debt to pay the interest on the current debt.  Its a national debt treadmill to hell.  If the US government even starts on a lower deficit trajectory, it would crush the stock market and the economy so fast that they would quit right after they started.  

The US government is acting like KKR.  They are acting like the Carlyle Group.  They are levering up via Treasury issuance to funnel liquidity to the top 5% in the country, which the top 5% are using to buy large cap US stocks.  The public balance sheet gets worse and worse, loaded to the gills in debt, and the private balance sheets gets better and better, loaded up with financial assets.  There is no magic to the US economy.  Its the US government acting like private equity, using debt to indirectly buy up US stocks through the liquidity that they pour to the rich.  Sacrificing the bond market to boost the stock market.  It creates the illusion of a strong economy, but its all a money illusion created by nominal growth, which is almost all inflation. 

This bond market fragility makes this aging bull market in US stocks so precarious.  Stocks and bonds are linked.  Investors demand higher equity returns when bond yields are high.  Otherwise, investors would rather just invest in the less risky asset with the higher yields.  To get higher equity returns, valuations have to be lower.  That is why most of the worst selloffs in the post 2008 era have happened after bond yields were rising: August 2011 (European sovereign yields rising), August 2015 (the first Fed rate hike since ZIRP, causing bond yields to rise ahead of the rate hike), October-December 2018 (a rate hike every other quarter for several quarters with 10 year yields rising from 1.32% to 3.24% over 2+ years), and January 2022-October 2022 (most rapid rate hiking cycle in recent history).  

The bond market weakness is not an immediate concern, when risk appetite is so hot and heavy like it is now.  But it will matter when this rally cools off and the Trump euphoria wears off.  I suspect that will happen early next year, as Trump enters office and the reality is less than what it was hyped up to be.  

We finally got some liquidation of long positions among asset managers in SPX futures ahead of the election, as shown by the COT data as of last Tuesday, Nov. 5.  The absolute net long level is still quite high, but off of the very high net long levels reached in October.  That was part of the reason that the risk on rally was so strong last week, as asset managers scrambled to re-add risk, while dealers had to delta hedge their short put positions by covering shorts, as the IVs got crushed, taking the OTM put deltas down with it.  

This bid is spilling over into the new week, as we are getting a gap up and enthusiasm is rampant.  Bitcoin is over 82K, TSLA is mooning, and speculators are out in force pushing things higher.  It is too early to try to be cute and short this monster.  This is a freight train that is running over the knee jerk contrarians.  Sold part of my SPX long position, but still long some to ride the Trump hype train.  Will look to sell the remainder of longs this week if we get a further rally into November opex.  Not thinking about fading this train until late November/early December, after more chasers have gotten on board.  For the remainder of this month, I would rather short a counter trend bounce in Treasuries than a further rally in stocks.  Its a tough time to try to short in November and December, with so many capital gains in stocks that will likely be delayed into 2025.  For those with bearish thoughts, or natural born faders, its a good time to take a 2 week break. 

Election Uncertainty

There are tendencies in the financial markets.  These tendencies revolve around investor behavior.  In particular, behavior surrounding hyped up events.  There are very few bigger hyped up events than a Presidential Election.  This event trading phenomena is repeated over and over again in the markets, as written in a blog post about events last year.  The upcoming Presidential election is the next big event.  What has surprised me is how little concern there was regarding the election up until last week, when we had that big one day drop on Thursday.  Once again, it takes negative price action along with event risk to get investors' attention.  Just an upcoming event is not enough.  You need to see weakness ahead of the event to get traders concerned about adverse outcomes.  

Investors are almost always long financial assets.  Their asset allocation will be dependent on the market environment.  The current market environment is an expansionary fiscal policy with loosening monetary policy with little concern about inflation.  This type of loose fiscal and neutral to becoming loose monetary policy is favorable for equities, and somewhat unfavorable for bonds.  That's what's happened over the past couple months.  The upcoming event, the election, will not change the fiscal situation.  Both candidates don't care about the huge government budget deficit, and are becoming more populist.  Both Republicans and Democrats have thrown fiscal conservatism out the window, and are raging spenders and tax cutters.  Throughout the campaign trail, you have heard both Trump and Harris talk about no taxes on tips, tax credits for new home buyers, no taxes on overtime, etc.  

So once the election is over, investors are likely to go back to buying stocks once the uncertainty is eliminated.  This will happen during a very bullish time period for stock buybacks, as November and December are historically very heavy buyback months. Those 2 months account for 23% of buybacks historically.

As for monetary policy, there will be no change over the next year, since Powell will still be Fed chair, but from 2026, the Fed could go in 2 different directions.  Since the markets are so short term thinking, I won't go deep into what could happen from 2026 depending on Trump or Harris winning, but its easy to see a more explosive situation arising if Trump wins and Powell is fired.  

Powell is quite political, and power hungry, as he has shown most recently with the 50 bps rate cut ahead of the election to try to boost the markets higher to help Harris.  If Harris wins, Powell, will have more incentive to be dovish, as he will have a legit chance of getting renominated.  If Trump wins, Powell will realize he has no shot of getting renominated, and will have no incentive to be over dovish as he is now.  

The markets are worried about higher inflation under Trump, as its likely a Republican Sweep if he wins, meaning he'll be able to get more tax cuts passed.  Tax cuts stimulate the economy, as well as blow out the budget, both bad things for bonds.  The bond market has sniffed this out, and has sold off relentlessly since the Fed rate cut in September.  Its clear that bond investors are much more scared of the election outcome than stock investors.  Bond investors remember getting crushed in late 2016 when Trump got elected.  They have PTSD from that episode, and are exercising caution this time around, and are delaying any bond purchases till after the election.  

More recently, stock investors have gotten nervous as the gap between Trump and Harris odds of winning narrows, creating more uncertainty, and a greater possibility of a contested or undecided election for an extended period.  The market hates uncertainty, even if the fiscal policy effects are not that much different between the 2 candidates.  You saw some nervous longs reduce their equity exposure and there have been many more bearish postings on Twitter.  

Over the weekend, you had a poll showing Harris ahead by 3 percent in Iowa, a number that was completely out of the blue, in a historically a deep red state.  It seems like everyone still believes the polls.  The polls have shown in both 2016 and 2020 that they just do not cover Trump accurately.  Trump voters have a much less propensity to participate in these polls.  And it makes sense.  In general, Trump supporters are more anti-establishment than Harris supporters.  Many of them don't like to be involved in polls.  Plus it seems like there are a lot of shy Trump voters.  That is why the polls vastly underestimated his support in 2016 and 2020.  There is no legitimate way for pollsters to correct for these errors.  They can't just put in more Trump votes to try even out the polls and make them more accurate.  They can try to weigh the sample to cover more Trump supporters, but that adds a huge margin for error for the results.  That makes the polls even more useless, as the pollster is pushing his thumb on the scale, to try to come up with a result that he thinks is the most accurate.  

If you look at what issues are the most important for voters, the economy is clearly the most important.  These polls are more accurate than polls over who wins because its less partisan, and don't involve Trump.  Any polls that include Trump will just not be very accurate for the reasons stated above.  With the economy the most important issue, and with more voters thinking Trump is better for the economy than Harris, you should expect a lot of independent voters to lean Trump.  In particular, many independent voters who invest in stocks will naturally lean towards Trump because they will believe that Trump is better for the stock market.  And with the high inflation under Biden, those that are hurting from inflation will also naturally lean towards Trump.  

If you add race, gender, and name value into the equation, they all favor Trump.  It may seem ridiculous, but a lot of voters will vote for who they know, even if they aren't supporters.  That is why incumbents have a natural advantage over a challenger in Congressional races.  Males have an advantage over females.  Whites have an advantage over blacks.  In particular, liberal female candidates are always going to be at a disadvantage in a general election.  They have very little crossover appeal.  That is why you've seen so many right wing female prime ministers in Europe (Thatcher, Merkel, Meloni, Le Pen) and almost no left wing female prime ministers.  Female candidates tend to attract female votes, in addition to party votes.  If most female voters are in the same party as the female candidate, then there are fewer additional female voters (independents and the other party) to pickup.  Since males lean to the right and females lean to the left, there are much fewer female Republican voters to pick up for left wing female candidates.  While right wing female candidates have many more potential female Democrat voters to pick up. 

Harris is the anti-Trump candidate.  Very few will be voting for Harris because they see her as a good candidate.  She was basically anointed as the candidate, with no voting involved.  I doubt she would have won the Democratic primary if Biden had dropped out sooner.  She is not popular.  Its hard to win as an anti-candidate unless you have several factors in your favor.  And she doesn't.  Biden is unpopular, and that gets passed on to Harris, on top of her original lack of popularity.  

Short term, if Harris wins, you likely see a reflexive, mild dip in stocks and a strong rally in bonds.  If Trump wins, you likely see a reflexive, mild dip in bonds and a strong rally in stocks.  I don't expect an extended selloff for bonds or stocks under either scenario.  Bonds have already front run a lot of weakness, so there isn't much more juice left in that short bond trade.  Stocks have corrected most of the post Fed cut rally, and are in a favorable macro environment of loose fiscal, and neutral and loosening monetary policy.  Plus, stocks have strong upward momentum and favorable seasonal factors.  Both stocks and bonds would be a buy on dip scenario if there is a little panic, post-election.  Based on the high VIX readings and the low realized vol, there is a lot of potential vol compression that could happen after the election.  The current COT readings for VIX futures show speculators with a slight long position.  Historically, speculators have held large net short VIX futures positions.  They rarely get long, except during panicky markets, such as Covid panic of 2020, VIX panic in early 2018, and the heavy selloff in late 2018.  I expect a big vol crush post election, which will be favorable for equities as delta hedging from vanna flows will cause dealers to cover shorts.  

Bought the dip last Thursday to get long SPX for the next few weeks, expecting a Trump win.  This is mostly an election trade, looking to catch a post election rally that could last from 2-4 weeks.  Longer term, I remain bearish due to high valuations and high equity allocations.  A post election rally could be the beginning of the topping phase for this raging bull market.  Tops are a process, so expect choppy range bound trading with lots of ups and downs over the next 6 months before the transition to a long term downtrend.

Thoughts on the Election

A lot of investors are now accepting that Trump will win the election, with a good probability of a Republican sweep of Congress.  I agree with the Wall St. consensus that Trump wins.  Harris is just not a popular candidate, and has much less name value than Trump.  Add to the fact that she's the VP under an unpopular President in Biden, who helped usher in a very high inflation period.  And she's a black female, which makes it the worst demographic to get elected for President in the US.  

Contrary to what many Democrats believe, white candidates have a built in racial edge over black candidates.  Male candidates have a built in gender edge over female candidates.  There is a reason that you've never had a female US President.  And you've had one black President, who only got elected because he ran against a female primary candidate and during a severe recession under a Republican White House, guaranteeing a Democrat win in the 2008 election.  

Harris will get the anti-Trump vote, and the Democratic vote, but she won't get much of the independent vote because of the above reasons.  Overall, it looks like Harris is very likely to lose, although I would still give her about a 10-15% chance of winning because the polls are close.  But I think polls still underestimate Trump's support because there are still lots of shy Trump voters who don't like to admit that they are voting for him because of his un-Presidential behavior, and he isn't politically correct.   

Under a Trump presidency, the Trump tax cuts get extended, some tax cuts are possible, some additional tariffs (unlikely as much as Trump threatens), and less immigration = slower population growth and labor force growth.  This will increase the fiscal deficit, increase inflation due to a combination of lower taxes and fewer workers, and lead to higher bond yields.  It seems some investors are jumping the gun, looking at history, and thinking a Trump win will be a repeat of his first term, when you had a roaring bull market in stocks.  This is only feasible if you have blockbuster earnings growth (unlikely without another Covid era money spew) or have a further expansion in valuations on top of already historically nosebleed levels.  All while bond yields stay high due to the inflationary impact of loose fiscal policy/higher tariffs/tighter immigration.  Odds are high that the next 4 years in the stock market are nothing like 2017-2020. 

Under Trump's easy money fiscal policy regime, demand is artificially increased which creates higher growth.  That higher demand has 2 release valves.  One is through the bond market.  The other is through the currency market.  If the Fed decides to stay vigilant against inflation by reacting to higher inflation with higher interest rates, then bonds become the release valve of this high pressure economy.  Yields go higher.  If the Fed decides to ignore the higher inflation, then the currency becomes the release valve.  Financial repression through negative real interest rates will weaken the dollar, leading to even higher inflation in a vicious loop that will cause a bear steepening of the yield curve.  Of course, if the Fed restarts QE, then the bear steepening is suppressed, at the cost of further dollar weakness. 

In the first higher yields scenario, you get higher bond yields and lower stock prices.  In the second financial repression, weaker dollar scenario, you have a wildcard.  It is hard to predict how that affects the stock market.  If commodities skyrockets along with inflation, that will make stock market investors nervous, and you could see earnings go up but valuations drop hard.  If inflation doesn't get raging hot like 2021/2022, then you could see stocks go up along with a weaker dollar. 

Powell will be Fed chair for at least the next year, and if he's a lame duck as would be expected under a Trump presidency, he will no longer have to play politics and will focus more on his legacy, thus try to keep inflation under control.  He will become more hawkish as a result.  If the stock market isn't in an entrenched downtrend, I would expect Fed funds rates to stay higher than what the STIRs market is anticipating, meaning that you should see only 2-3 more rate hikes from now till the end of 2025.  That will eventually catch up to the bond market, as the maturity wall for corporate bonds will be coming in 2025 and 2026.  Corporations will have to refinance at much higher yields than previously, and interest expense will continue to creep higher.  

I expect the stock market to eventually readjust to a return of a tighter Fed in 2025 by going down.  It may take a few months for this to happen as the initial economic bump up from having Trump elected should keep the stock market buoyant.  By the 2nd half of 2025, this short term Trump adrenaline shot will have to face the new monetary reality.  At that point, a 2nd half 2025 waterfall decline in an overvalued, overowned SPX will be matter of when, not if. 

You likely get a reprieve from hawkish monetary policy in 2026 if Trump does what I expect him to do, which is replace Powell with a dovish lackey for Fed chair.  But the financial markets are so short term focused that its not even worth thinking about till right before the Fed renomination decision. 

The longer term effect of a high deficit, negative real rates policy under Trump is political change.  There will be a different US president in 2028, and by that time, raging high inflation will cause immense pain to the bottom half of the population.  That would basically be handing the Democrats the keys to the White House and Congress in 2028.  Controlling inflation will be the priority among the masses and that will be when the Fed has to make a hawkish turn to accommodate public opinion.  A Democrat sweep will be waiting in the wings, and it will be accompanied with higher taxes and higher interest rates.  Again, this is a much longer term consequence of what is likely to happen over the next 4 years and is not something that is market actionable.  

It appears that the late Friday selloff was due to the telegraphing of an Israel strike on Iran over the weekend.  The unwind of the afternoon selloff has happened overnight, and we're right back to no-man's land.  This is a level in the SPX where neither longs nor shorts have much edge.  Although given my belief that there will be a Republican sweep in next week's election, I would rather be long than short from now till then.  Ahead of big events, the financial markets have a tendency to front run the expected result and squeeze out much of the post move juice that would have happened without the front running.  

I was hoping for a move lower ahead of the election on the uncertainty but too many investors have FOMO, and don't want to miss a rally on a Trump win, which most investors expect.  I got out of all shorts last week, on that small dip.  Seasonal weakness is now behind us, and after tech earnings this week, the corporate buyback window is wide open.  

It is tough to find a real edge here, because if there was a 100% probability of a Trump win, I would go long, but that's not the case.  There is some small probability of a Harris win, and that potential downside keeps me from chasing longs here.  I think its a bit late to be short here with the election only a week away.  Some may question the premise that a Trump win would be good for the stock market, and I agree long term.  Especially if bond yields remain high in 2025, which would be bearish for stocks next year.  But over the short term, the vol crush after a big event like a Presidential election being over would be enough to squeeze the SPX higher for at least a few days.  Even with bullish expectations that you have going into it.  

Bottom line, its not a good risk/reward spot for either longs or shorts for both stocks and bonds.  Some may be tempted to try to buy the correction in Treasuries but I see little upside near term there, and there could be one last reflexive dump in bonds after a Trump win.  If that happens, I would consider buying Treasuries for a short term trade.  Right now, I don't see much edge.  In the case that you get a move towards SPX 5750 this week, I would be a buyer of that dip.  Otherwise, likely to be on the sidelines. 

The Long Game

"Win or lose, everybody gets what they want out of the market." - Ed Seytoka

Everybody gets what they want out of the market.  Contrary to what they say, many people are looking to maximize thrills by betting huge and minimize the emotional toll of grinding through the ups and downs of winning and losing.  Trading is a game made for masochists.  Its not a game that will make you happy in the long run.  Being a trader is similar to being a drug addict.  It is hard to stop once you get into it.  It dulls the senses, making other non-trading experiences less interesting and fulfilling.  One of the greatest traders ever, Jesse Livermore, considered his life a failure and killed himself in the end.  

You get to choose whether you want to play a long game or a short game.  Those that want to play a long game will innately trade in a way to ensure their long term survival.  They can sense when they are in danger and betting too big, and reduce size and cut losses to live to fight another day.  Those that want to play a short game take huge risks and YOLO.  They are overconfident, but also know that they are living on the edge.  Its thrilling and exciting, but it doesn't last long.  They don't have the patience or the desire to play a long game.  

Why would anyone want to play a short game over a long game?  Its because of the emotional toll of trading.  The basic principle of this emotional toll is the pain of loss vs. the pleasure of gains.  It is widely known that the pain of a loss is felt greater than the pleasure of a gain.  Losing $10,000 will be much more painful than winning $10,000 is pleasurable.  Let's roughly estimate for gains and losses of equal amounts to be:   Pain of Loss = 2 x (Pleasure of Gain).  In order to emotionally break even, you have to have at least twice as many winners as losers (of the same size), or at least 67% winners to be emotionally "winning".  That is extremely difficult to do.  

Thus, to maximize the pleasure from trading, traders will often choose to incorporate a high winning percentage strategy, which means taking many small winners and letting losers run, in order to increase their winning percentage.  That's a formula to maximize long term emotional "gains", but not the formula to maximize long term financial gains.  Partially its because markets tend to follow trends more often then not, which means that letting losers run is a very bad strategy.  Its also because when you hold on to losers and cut your winners, the size of your losing trade becomes bigger relative to the size of your total account balance.  You end up taking bigger risks in the worse spots, and taking smaller risks in the better spots.  That is a long term loser of a strategy.  Yet, this is an emotionally appealing strategy from a reptilian brain wiring of win = good, loss = twice as bad point of view. 

A huge majority of human beings have this emotionally reptilian brain (including me).  It means that most of us are not emotionally designed for optimal trading.  We feel pleasure from taking winners.  We feel more pain from taking losses than from holding losers in the hopes that they turn into winners.  The longer we hold on to losers, the harder it is to take those losses, especially after all the mental capital that was spent holding on and hoping that the losing trade would come back and turn into a winner.  

A disciplined, winning trading strategy usually maximizes pain (lots of losses) and minimizes pleasure (larger, but much fewer wins).  That is why trading successfully is for masochists.  You have to enjoy the pain of taking losses, with the long term view that your short term emotional pain will lead to long term financial gain.  A lot of traders know this, but subconsciously cannot follow this strategy because its emotionally painful.  For those who are emotionally invested in their trading/investing accounts, being disciplined and taking lots of losses is self-induced torture.  That is why many choose to bet huge, to YOLO, to get away from the grind of this self-induced torture.  It is the strategy that maximizes long term emotional happiness, but also maximizes the probability of blowing up. 

You don't have control over where prices will go, but you do have control over how much you bet.  In my early days in the markets, I thought it was all about picking the right direction, whether it be up or down.  And while being a good forecaster and predictor is important, its less important than knowing how much to bet.  You can be the best predictor of prices in the world, but if you are bad at choosing bet size, you will either blow up or make very little.  

It is during losing streaks like the one that I am in right now that remind me of the importance of money management.  Its sucks to be in a deep drawdown but you can't allow your emotions to take over.  If you do, you'll try to find a quick way out of this painful spot by betting big, to make that quick comeback, to feel much better again.  That is dangerous.  That is the psyche that destroys trading accounts.  Been there, done that.  During losing streaks, it can feel like Chinese water torture.  Taking short cuts to try to relieve the pain of losing is lethal.  In order to win in the long run, you have to be a masochist.  You have to accept short term emotional pain as part of the process to achieve long term gains.  

The latest COT and options data shows no major changes, investors are dug into their heavy net long positioning, with lots of call activity and its working, so I would not expect anything to change until you start seeing bigger moves up and down.  This upward grind during a seasonally weak time period is a horrible market for my style of trading.  The nosebleed valuations make any long term longs a poor risk/reward trade.  It feels like insanity to be short this market.  But historically, these type of overvalued markets with investors heavily allocated to equities occur near market tops.  But market tops are usually a process that takes many months before the trend changes, so we have to patient, but persistent in looking for the big down move.  Its a tricky balance to maintain, but there will be great opportunities for those with a bearish bias in the next 12-18 months.  

The bond market weakness is partially reflecting election uncertainty and the fear of a potential big selloff like you saw in the past 2 elections.  The bond weakness is also showing the unfavorable supply/demand picture for Treasuries.  The giant fiscal deficit means lots of Treasury issuance, much of that having to be taken in by non-public investors.  Until the Fed restarts QE, bond investors face this hurdle of heavy supply.  This supports the long term bear thesis which is predicated on equity valuations being extremely high relative to bond valuations.  

Equities are at the bottom of the corporate capital structure, and face the most risk during economic downturns.  Therefore, earnings yields (inverse of the P/E ratio) should naturally be lower than long term corporate bond yields, due to the added risk of equities.  With long term investment grade corporate bond yields around 5%, the fair value for earnings yields should be above 5%.  Or put another way, the P/E ratio should be below 20 in this high government deficit, heavy Treasury supply market.  But with an estimated 2024 S&P 500 earnings of ~$250, the current P/E ratio based on 2024 earnings is approximately 23.4.  Based on this metric, the market is at least 15% overvalued. 

Still stuck short and not looking to hold beyond this week.  Post October opex week is a seasonally bearish time of year.  With many already assuming that Trump will win, there is plenty of room for the crowd to migrate towards a more neutral positioning ahead of the election.  The market is pricing in a quite optimistic scenario and assuming that you will have a post election rally after a Trump win.  So many assumptions for the base case optimism on the Street right now.  If even one of those assumptions comes under question over the next 2 weeks, you can have a quick dip lower (likely to be bought immediately).  The bears have one week, perhaps two weeks max, before the probabilities shift much more favorably to the bull side.  I will let the shorts play out this week and get out.  Its been a terrible ride for shorts, but this pain will set up a much more favorable environment for shorts with the tenacity and patience in 2025.