Beginning of the End

We got the thrust higher off the Thursday, May 19 bottom that we hit when the put call ratios went sky high on Fed rate hike fears.  A lot of the buying power fueling the rally from that bottom has been short covering, and the short base is extremely depleted at the moment.   Usually, 2-3 weeks is about the most a short covering rally can last.  We are nearing the end of that window.

 If the market wants to go higher from here, it has to bring in longer term investors.  I just don't see that happening with the Fed preventing any kind of bubble formation with their hawkish talk.  They will keep a lid on this market because there is no way this market stays above 2100 if the Fed does a rate hike.

So with the Fed hell bent on maintaining what little credibility they have left, albeit with horrible timing, they will be the ones that keep this market range bound.  So instead of a Fed put, you have an implicit Fed written call (short call position) with a strike price around 2100.  They will talk hawkish when the S&P trades near 2100 or higher, and go for rate hikes when they can.

With the lack of earnings growth and potential negative catalyst in the uncertainty of Trump and China devaluing the yuan to stave off a financial collapse, the bears have the edge here.

The bond market pulled back on all the hawkish talk from the Fed but the fundamentals remain strong.  I would expect bonds to rally in the coming weeks as stocks pullback.

We are teetering on the edge of the cliff, like August and December 2015.  This time, the downtrend should last longer than 5 weeks.  Any shorts around S&P 2100 are great risk reward trades.