European Weakness & Fewer Shorts

Everyday you have the Eurostoxx underperforming the S&P.  Perhaps this is pre-Brexit vote selling in Europe.  Europe has the much weaker equity markets and has been lagging the US ever since we heard those EURUSD parity calls in early 2015.  The S&P has been able to shrug off weakening Europe and rally right off the cash open when European weakness sets up a gap down or flat open but not today.  This rally off the May 19th bottom is quite mature now, exceeding 3 weeks, with investors complacent.  So you are at that time period where the market begins to get volatile and a top is soon formed.  

Also, you have seen shorts covering the last few weeks in SPY:

We are now at the lowest short interest in the SPY over the past year.  This looks like a setup where weakness will not be buffered by short covering because the short base has been declining steadily.  The bears have slowly given up in both equities and bonds.  I remain bullish on bonds despite the increased optimism because economic weakness should finally catch up to the S&P and cause the Fed to become more dovish in the coming months.

Bonds are short term overbought, and likely going to take a little breather here now that we are at 1.65% strong support for 10 yr yields and the psychological 0% barrier for Bunds.  We could get a little bounce towards 1.73%-1.75% but that would be just a great buying opportunity.  Anyway, any consolidation you see at these levels will just set up a bigger push lower in yields.  I expect 10 yr yields to challenge and break below the all time low 1.38% set in 2012.  I could see it happening within 2 months.

It is time to ramp up the short equity exposure, it's gonna get ugly soon with the biggest support for the S&P, the corporate buybacks, having their buy window closing next Friday.