V Bottom Again?

After so many V bottoms over the years, the first instinct after a 5 day rally off a bottom is that we will keep grinding higher and higher.  But I don't believe that to be a likely scenario.  First of all, there is still a big risk event coming up in April/May, the French elections, which has hardly been mentioned.  That means there are few worries about it, even though it seems like Le Pen still has some possibility to win.  Next, the lack of a bigger thrust higher off the Monday close shows that there is not as much rocket fuel for this rally.   We are already flattening out around 2360-2368 SPX zone, which is the consolidation zone from pre-FOMC.  There is more resistance than people think.

I am hearing the bulls get loud again, already, thinking V bottom.  The strong intraday price action has gotten them bulled up again.  Although this rally has lasted longer than I expected, it just doesn't have the momentum of past V bottoms.  And the bull's favorite, the financials, are still trading well off their highs earlier this year.  Perhaps the market can grind slightly higher in the favorable early April seasonal period, but that should be the local top for this move, and we should retest SPX 2325 in the coming weeks.

Faster Tempo

The markets have changed since the HFTs and systematic trading algos have taken over the short term trading space.  This includes anywhere from time frames from a few milliseconds to a few days.  The moves don't take their time to get to their destination.  As you saw on Monday, as soon as the gap down showed signs of being bought in the morning, it was a one way street higher for a few hours, and then basically flatline/consolidate into the close.  Same thing happened on Tuesday.

What should have taken probably 3-4 trading days to go from a gap down of 2320 up to 2360, took just 30 hours.  Those that hesitate and wait for the pullback to get in are missing the whole move.  Once there is a decent sized pullback, it is likely a sign of a trend reversal.

In the era before the HFTs, not everyone reacted to the market action as quickly.  The tempo has speeded up to the point that FOMO kicks in, and the market overextends, like what you saw yesterday afternoon, and has a healthy little selloff into the close.  Yesterday's action, with that selloff into the close, reinforces the 2360 resistance area that will be hard to break through with French elections still ahead and likely quarter end rebalancing from stocks to bonds.

The best way to adapt to this new HFT world is to base your entries on price, not time.  If you are trying to wait for the right price and time to enter, you will likely miss your entry.  If you are just looking at price, then you might be entering a few hours or a day or two earlier than you planned, but that is the only way you will beat the HFTs to the punch.  It may be scary to buy on the downside of the move, but that is the only way that you will be able to get in before the upward move begins.  You have to anticipate the HFT's moves, and get in right ahead, before they go bananas front running the hedge fund herd that pile in relentless at the first sign of a bottom (like Monday morning).

High probability of another test lower of the SPX 2320-2325 zone in the next few days.  Still range bound between 2320 and 2360.

Scarecrows Aroused

Here we go.  The scarecrows are in motion today.  Nothing like a good gap down on political "news" to stoke the fear in the Trump trade.  There was a counterintuitive bounce at the close after the healthcare bill was pulled because the simpletons thought it would mean a faster track to tax cuts.  But then the media went to town on the implications for Trump's tax policies and it was deemed to be a negative, making it harder to get tax reform.  Don't buy it.  It just makes the Republicans more determined to get tax cuts.  They HAVE to get something done, or they will look totally incompetent.  Even if it means selling their soul to the Freedom Caucus to do it.

As I write, the market is already making a move higher off this reflexive gap down, as it was an overreaction.  There was already a lot of put activity last week based on healthcare bill worries, now that bridge is passed, you should see an oversold bounce.  All the scarecrows are out in force declaring the death of the Trump trade.  Even though I believe it is a bunch of hype, the Trump trade is not over.  As long as tax reform is ahead, and not in the rear view mirror, the bulls will have hope, and the stock market thrives on hope.

I would be a buyer intraday today, looking for a move higher into Wednesday.  Then we should get another test lower after the oversold bounce peters out.  SPX 2320 is a buy area, and SPX 2350-2355 is a sell area, for the week.

Mountain Out of a Capitol Molehill

Here we go again.  Another exaggeration effort by the media and the financial market "analysts".  This one really does take the cake.  If there ever was a more meaningless hyped up vote than this one, I can't think of it.  You cannot compare this with the fiscal cliff or TARP.  Those actually affected the economy, and thus the markets.  This one, even if it passes, is almost guaranteed to get shot down in the Senate.  And if it doesn't pass, nothing changes.  The Republicans will just be able to move on quicker towards tax reform.

On a "no" vote, I would buy any dip towards SPX 2325-2330, as I see it as a short term overreaction.  I would sell quickly on the subsequent bounce back because there are other things more troubling for this market.  On a "yes" vote, I would wait for the market to get back towards the SPX 2360 area and short it.

This vote doesn't change the market situation.  Investors are paring back risk, and the more important event, the French elections, is being ignored as all eyes are on the healthcare bill.  I actually expect even more weakness when the worry comes to the French elections and a possible Le Pen win.  The European scarecrows will be out in droves stirring up the markets then.

Watching and waiting, looking to fade any overreactions.

Healthcare Bill

All are waiting for the vote on the House healthcare bill.  Fast Money traders seem confident that the bill will be passed, and that the market will rally on that news.  Of course, I would question that view.

First of all, the House passing the bill doesn't mean that the bill becomes law.  It also has to pass through the Senate, which will be a much tougher task, because there are already quite a few moderate Republican Senators looking to vote no, along with a few extreme conservatives.  And Republicans only have a 52-48 majority, making just 3 no votes enough to torpedo the bill.

I wouldn't extrapolate the results of the healthcare bill to anything on tax reform.  Tax reform will be the easier of the two to get through Congress.  In fact, the healthcare bill has gone more favorable for the Republican leaders than I originally thought.  It is a politically toxic bill, but Trump apparently has done some threatening to the lower members to jam it through.  Tax cuts will be MUCH easier to pass.  If anything, over the medium to long term, it makes me more optimistic that tax cuts will be enacted, because it shows how Republicans are hell bent on getting through their agenda, popularity be damned.

I am looking to short any brief strength we get on the healthcare bill passing the House.  Its importance is being blown way out of proportion.  I find it interesting that there are very few mentions of the French elections despite the selloff.  That just means that the bears still have that card to play if they want to make a raid on this market.  And it is an Ace up their sleeve, because the fears of a Frexit is exponentially greater than any fears of a Brexit.

Remain bearish SPX, and would short any kind of rally on the House bill passage.  I expect that rally to be very brief, most likely less than a day.  And if that bill doesn't get passed? Well, you will most likely see a fat gap down on Friday.  

Gap Down After Drop

Not a good sign for the bulls for the next couple of weeks to see this market gapping down after a big drop the previous day.  Usually you see a little gap up after days like yesterday.  There will be more selling in the weeks ahead, although probably an oversold bounce today into Yellen speech tomorrow.

We will probably have to make a lower low today and then there could be a quick daytrade opportunity on the long side.  There haven't been many down days to buy throughout this rally, so I am sure there will be dip buyers anxious to buy today on any weakness, for fear of missing the choo choo train higher again.

Any intraday low towards SPX 2325-2330 will be a buy zone.  Not interested in shorting today.  The S&P is tradeable again, with the return of volatility.  I give this about 4 weeks max before the rally monsters come back with a vengeance.  In the meantime, there will be daytrading opportunities.  Medium term, I don't see a lot of downside from here, perhaps another 30-40 points, before we find a level where buyers will come in to support stocks.

There was no news to drive this market lower yesterday, Trump not being able to bully the healthcare bill through Congress was forecast weeks ago.  It just happened that post opex, with many investors feeling like puts are a waste of money, decided to go unprotected.  This is what happens when they are unprotected.  Plus buyback blackout period and French election fears.  It is almost the perfect scenario for bears, till mid April.  But it will be choppy.  Dip buyers have a lot of ammo considering there have hardly been any dips the past 4 months, and they will provide support on intraday swoons.

French Election Selloff

It's already started.  With 4 weeks till round 1 of the French elections, the investors are starting to get nervous.  Sure, the polls say that Macron won round 1 of the debate, and is favored to win round 2 over Le Pen by 20%, but after the Brexit and US presidential polling misses in 2016, the trust is gone.  French political uncertainty will be getting priced in quickly over the next couple of weeks, and it all starts off with days like today, finally a 1% down move intraday.  I am sure the dip buyers are salivating at the chance to buy "bargains", even though they are just at the same price they were 4 weeks ago, which was an all time high at the time.

Let's face it.  The S&P is a pig.  It is a bubble.  This is what happens to bubbly markets.  They drop suddenly for no reason.  I expect more weakness in the coming weeks so I will pass on this BTFD opportunity.

It is a pity that I missed the SPX short by a few points last week, but with my position in bonds, I wanted to be selective about shorting ES.  Oh well.  Too late to short 'em.  Too early to buy 'em.

Human Edge is Intuition

The markets are more competitive than they were 20 years ago.  Back then, there were no HFT firms front running everything.  There was more paper flow, human market makers made many more mistakes than HFT bots do now.  Even the medium frequency time frame was a lot less competitive.  The markets would take a longer time adjusting price to new information and size order flow.  Now, all the HFTs and black box programs are hyenas with a keen sense of where the kill is, scavenging away any bits of meat before others find it.  Trend moves that took all day happen in an hour, and then flat line.

If you are a size player, you cannot compete with the HFT algos in scalping and time frames less than an hour.  The slippage is too great because the HFT front runners run amok, now that spoofing has basically been legally prohibited.  The ladder provides much more useful information to the HFT predator now that the fake orders are gone.  The hand trader cannot compete in that space because of much slower reaction times to new order information.  If you are a small lot trader, you can squeeze in and out, but it is exhausting work, with the margin for error much smaller now that the HFT cops are on the beat, snapping up edge immediately.

The systematic trader has never faced so much competition in his life, with system setup getting easier and easier, and more institutions using black box trading.  The black boxes have literally turned into red boxes, from the blood of all the competition.

Ironically, the proliferation of systematic trading and algos has left the hand trader a niche that is still quite profitable.  That is if the discretionary human trader has good pattern recognition skills, a strong fundamental base for the market or stocks that he trades, and good intuition to put it all together to know when to enter and exit.  Pattern recognition is a subset of intuition, and it can really only be gained by trading experience.  But experience is only as good as how it is applied, which is what separates the profitable from the unprofitable.

A.I. and machine learning is all the hype these days, but as long as the majority of the assets under management have human discretion, they will not be able to match the skills of a good hand trader with good trading intuition.  I will always take a good human trader who understands market psychology,  investor positioning, fundamentals, and use those variables to come up with a good trade.  When traders stop discounting prices due to uncertainty, will be the day that A.I. beats the advanced discretionary trader.  I doubt that day will come.

Also, the trend towards passive funds just means that sector allocation has become more generalized, it doesn't affect a manager's discretion to change their beta exposure.  It has little effect on index futures traders.

In order to succeed these days, you have to compete in a different time frame than the computers, who excel in the high frequency space.  Medium frequency is even starting to get a bit crowded.  Lower frequency trading is the sweet spot for the human trader, who can be much better at predicting longer term moves than the bots.  This doesn't mean any human trader can beat the bots.  It takes time and innate talent to develop the skills to win at this game.  And the game changes from time to time, on an irregular schedule, making it harder.  Always adapt, but don't throw away the fundamental base that you will always need for any reliable long term predictions.

We have a small gap down after a little nasty close on Friday.  Post opex forces at work, this time towards a risk off theme as March put protection is gone.  Looking for SPX weakness this week, and next week.  

Buyback Blackout Period

We are now entering the corporate buyback blackout period ahead of Q1 earnings announcements.  This bull market has gone up mainly because of the corporate buyer, willing to issue bonds to buy back their own stock.  For most of the past 8 years of this bull market, you have had net outflows from equity funds.  The market has been able to overcome this outflow with corporations buying back a ton of stock, reducing supply enough to drive prices higher.

A disproportionate number of pullbacks have occurred during this buyback blackout period: October 2014, January 2015, January 2016, October 2016.  That covers more than half the meaningful pullbacks over the past 3 years.

Plus with the likely reduction of long equity positions ahead of the French elections, it is a near ideal setup for a short here.

Don't believe the hype that the market wants to see the Fed hiking.  The market always wants easy money.  The Fed seems determined to regain some credibility after completely failing on their forecasted 4 rate hikes in 2016.  A rising stock market has given them the perfect backdrop to keep hiking.  But eventually, the stock market will revolt and drop hard.  I don't think we are at that point yet, but it's something to look for later this year.  This economy is not as strong as the pundits make it seem.  It needs ZIRP and a rising stock market just to maintain its low growth.  If you have neither, which is very possible later this year, the economy will be in some pain.

Rally Already Fading

All the buyers that waited to buy after the Fed hike was announced after Yellen was less hawkish than expected are sitting on losses.  That is why you don't overreact to a Fed rate decision.  Yellen was her usual ambiguous self, learning her lesson after her March 2014 press conference experience where an off the cuff remark about timing caused the bond market to have a mini panic.

The best times to buy for the Fed is the day ahead of the meeting, and to sell at the open the day after.  This is just experience, there really isn't a good explanation, other than you have a subset of traders that will always go to cash ahead of a Fed announcement and buy afterwards.  That is why you saw a feared event, a forecasted rate hike, turn into a buy the news event, as stocks, bonds, and gold all went up together, with the dollar going down.

Haven't we learned our lesson by now, after 8 years of mealy mouth commentary from the Fed?  They have vastly different thresholds for easing and raising.  It takes a lot of good news to raise, and not that much bad news to ease.  For them to have a hawkish hike, it would require the S&P to be in a full blown bubble, not just a small bubble.  It would require nonfarm payrolls and CPI to go through the roof, and that just isn't likely in this economy.

The best strategy going into a Fed announcement is to expect them to be more dovish than expected, especially if it is a press conference meeting.  The markets are always eager for the Fed to hike rates, to do something, to stop being so easy, but you can't change the animals stripes.  They are born to pump, and it requires a lot for them to stop pumping.  Their default setting is to let bubbles grow until they get so big that the market begs them to hike, just as it did a few months ago after the post election rally.

This market is due for a deeper pullback, and the setup is there ahead of the French elections.  That is all you will be hearing about in April.  2300 is very possible by April.  If I wasn't long bonds, I would probably be short stocks.  They are sort of redundant positions, so unless the SPX can get closer towards 2400, I will sit back and wait.  If we can get back towards today's highs (around 2390) within the next few trading days, I will probably short it.

Remember Yellen is a Dove

Despite the fears of an aggressive Fed, look back at their history.  Their forecasts have been horrible, and you can't take them for their word about future rate hikes.  The bond market sees this, and is not pricing in anything close to what the Fed dot plot forecasts for rates in 2018 and 2019.  There is a high probability that Yellen will be less hawkish than expected, so they don't box themselves into a set number of hikes and backtrack again, like they did last year.

You will probably get a small rally out of that, but the markets are going to be setting up for the French elections, which is the next big event.  Market has been trading weak ever since the all time high on March 1.  Even with all the inflows this month, the market hasn't been able to rally.  In a word, it feels like buyer saturation.  It is just not going to be easy to rocket higher from here until you get a resolution to the French elections and more certainty on tax reform.

Based on what I think Yellen will do, I would be long bonds and it might be worth a small long in stocks for a trade.  I am long bonds, but will not buy stocks here, as I expect them to be lower later this month.   2.60% seems to have held up against the bear forces and it looks like a double top and a buy zone from this paper napkin chartist.

Ultimate Top Still Awaits

I have been leaning more bearish on SPX lately, but I don't think that 2400 is the final top.  There will be more upside attempts as we get through some risk events, and more clarity on Trump's tax plan.  But we should have trouble going much higher ahead of the French elections, where you will definitely have scared European money sell ahead of time, fearing another Brexit like scenario.  Even though Brexit selloff only lasted 2 days, it was a scary 2 days.

There are some ingredients for a final top that are missing, mainly the presence of uncertainty.  Tops usually occur when there is very little uncertainty in the markets.  Oddly enough, the sooner that Trump can get his tax plan announced and passed, the sooner we will get the ultimate top in the SPX.  I believe he will get a tax plan passed, just because Republicans never met a tax cut they didn't like, and they control both houses of Congress.  They will use dynamic scoring to jam through a supposedly revenue-neutral bill, putting up absurdly optimistic assumptions for growth to meet those ends.

Only when that happens, will you have the right backdrop for a durable top.  Right now, everyone isn't buying into the rally because we haven't gotten the tax cuts.  They will be coming.  And the market will eat it up.

I am still waiting for the right entry point, the SPX just hasn't given a good short since my bad trade on March 1 when I should have just let the thing work for a few days instead of chickening out.  That is what 8 years of a bull market will do to a natural bear that actually survived.  The bears that survived are mostly chicken littles.

No opinion for the week, we may get a bit of a relief rally after the Fed rate hike, but it shouldn't last long.  After that, all eyes will be focused on the French elections, and that means selling equities.

Apex of Fear in Bonds

There is palpable fear that the Fed will be hiking rates much more quickly than the consensus analyst expectation of 2 times this year.  First it was Dudley, followed by Yellen talking up a rate hike for March.  Then came the blowout ADP number on Wednesday.  Then Draghi was unusually sanguine and positive on the economic trend in Europe.  And the NFP today was strong, as many expected.  This is a perfect storm for bonds.  Now we know what that fear level corresponds to in terms of price.  2.60% 10 year yields.  That is the level that yields topped out at in December.  The paper napkin chartist in me sees a double top in yields at 2.60%.

I see very few bullish bonds here.  Most are beared up beyond belief, whether due to the chart, or to Trump's expected tax policies, or because they think GDP growth will get to 3-4%.  I believe those views are way too optimistic.

It is normal for the market to selloff into a feared event.  That is what happened with bond selling ahead of an expected strong nonfarm payrolls report.  We got that report, and yields are actually going down a bit, even though it beat consensus expectations of 200K jobs.  If they already sold ahead of the event, well, there is only two options left, if they don't short.  And most bond managers don't short.  So that is buy, or do nothing.  Sometimes trading is just a logic game, and it is not complex logic.  But it does require taking risk when others don't want to.  Some people consider that dangerous, but it's not so dangerous if the discount in price amply pays for the "risk" taken.

The risk that traders are pricing in is for a more aggressive hike cycle by the Fed.  Both for bonds and stocks.  But unless Yellen has suddenly changed her stripes, she will stop in her tracks if the equity market gets shaky.  And based on how the market is trading over the past week, and the large inflows into equity ETFs and mutual funds, we are topping out.  The Fed is considering aggressive hiking into a highly indebted global economy, into an overvalued topping S&P 500.  That is a recipe for disaster.

It is just fund managers, and now retail, chasing short term performance, with disregard for the long term.  The biggest source of alpha for a fundamental trader is to buy and sell on a long term time frame.  That is the time frame that is least crowded.  You cannot consistenly trade a short time frame or you will get eaten up by the HFTs.  For those looking on a long term time frame, the opportunity is in shorting this overvalued stock market, or going long bonds.  Both should work out on a 1 to 2 year time frame.

Topping Phase

Let's look at the big picture.  Over the last 5 years, SPX has gone from 1370 to 2370.  It is up 1000 points.  Over that same time period, the 10 year yield has gone from 2.00% to 2.57% right now.  If you had told anyone in March 2012 that the S&P 500 would be at 2370, they would first, think you were crazy.  Next, they would probably guess that the 10 year yield was probably at 4% or higher.  Not 2.57%.  On December 2013, the Fed announced tapering, the 10 year yield was at 2.92%.  The SPX was at 1810.  Most people would think that if the SPX 3 years later was at 2370, they would be shocked to know that the 10 year yield was actually lower at 2.57%.

So if a long equity bull market can't make bond yields go higher, I can't possibly imagine what would happen if we actually had a bear market.  New all time lows in 10 year yields is likely in that case.

Bond yields have stayed stubbornly low despite the huge rally in the S&P.  The Treasury market correlates with other bond markets.  There are a lot of foreign buyers of Treasuries, and they buy because they don't want to hold negative interest rates bonds.  Europe has been Japanized.  They are stuck in low rates now.  Their economy can't get much better, like Japan, because the population isn't growing.  It is extremely hard to grow a developed economy when the population is stagnant.  There is no productivity growth.  Smart phones and flat screen TVs don't enhance productivity.  Robots do, but they replace workers, reducing wage growth, increasing unemployment, and hurting demand.  

The ADP number came out at 298K today, and the financial media is going nuts over that number, but the trend since 2008 has been an increase in lower paying jobs, keeping wage growth low.  You have had a boom in server and bartender jobs.  Not much has changed over the past 5 years.  Economy is still stuck around 2% growth, but the big difference is that the S&P is much higher, and global debt levels are much higher.  That is a bad combination for future S&P returns.  

High debt levels cannot sustain a high interest.  National debt of $20 trillion paying 2% interest is much different than $20 trillion paying 5% interest.  If the US government had to pay 5% interest on its debt, there would be an extra $600 billion per year required just for interest payment.  And the US debt is growing about $500 billion per year.  

You are already seeing a slowing in stock buybacks, because of higher interest rates.  Trump's tax plan is going to do very little for economic growth, since most of the benefits go to the top 1% who will just save more, and put it in stocks, bonds, and some real estate.  But the higher interest rates hurts a broader group, undoing most of the tax cut benefits. 

And it's still not certain how much the taxes will be cut.  If they cut the taxes too much, the budget deficit will balloon, and the amount of Treasury supply will be overwhelming, causing the 10 year yield to go artificially high.  That will put pressure on stocks, and then the economy, and force the Fed to cut rates and do another QE.  It will be similar to the 2000 to 2008 experience under George W. Bush.  Except the debt is much bigger this time and growth even slower.  

The SPX has been weak the past few days even as the VIX has been trading lower.  This not very common, but historically it usually means there is little downside short term.  Longer term, it just means there is a lot of complacency.  I stick with my view that we are forming a long term top this year.  Some of it is due to overpricing benefits from Trump policies, but most of it just the natural animal spirits forming after 8 years of a bull market.  Investors have been conditioned to buy, and eventually, it goes higher.  Now that the valuations are even more stretched, with low growth, and interest rates rising, it makes this market that much more fragile.  

I have gotten long some bonds today, seeing good risk/reward from here with the Fed hike priced in for March, and with the French elections coming up in less than 2 months.   I also expect the S&P to pullback going into April, so any rally towards 2400 this month will be a time to short.    

S&P Toppy

After touching 2400 on the first day of March, we have been trending downwards.  We even have one of those rare gap downs after a pullback.  I looked at the news wires to see why, and apparently North Korea shooting 4 missiles into the ocean was the reason cited.  LOL.  The South Korean index went up anyway and they say that's the reason the S&P futures are down.  Where do they find these financial journalists?  It's a thankless task, because they can't just say: the market was overbought, the S&P looks like it has topped so it gapped down this morning.

Usually you see some chop before the drop, but with these bubble markets, who knows.  I still expect a rally attempt starting today or Tuesday, but I expect it to fail and go right back down.  The FOMC meeting, Dutch elections, and then the biggie, the French elections are lined up in the coming weeks and months, so I don't think Europeans will be too willing to get even longer ahead of those events.  So any rally attempts this week will be a good chance to short.  Preferably, I would like to short within 10 points of the all time high, so at least SPX 2390 or higher.  Also, it looks like the pre-selling ahead of nonfarm payrolls this Friday and the probably FOMC rate hike next week could present a chance to buy Treasuries above 2.50% yields.  We'll have to see how the week plays out, but that is the basic game plan.

For the next month, there should be a risk off tone set by the Europeans who will likely reduce their longs ahead of the uncertainty of the French elections.  That should spill over into the US, as the SPX is stretched on the upside at this point.

Stubbornly Low VIX

The last couple of days has seen some decent volatility.  One big up day, and taking back over half of those gains in a day yesterday.  Usually when you get a down day, the VIX goes up.  Yesterday, VIX opened at 12.43, set a high of 12.71, and closed at 11.81.  SPX basically was trending down the whole day.  So the VIX went down a nontrivial amount even with a SPX that dropped from 2395 at the open to 2382 at the close.

Maybe it is just noise within this narrow range that the VIX has been trading the past 3 months, and perhaps there was a lot of excess vol priced in for Trump's Tuesday speech.  But usually you would like to see VIX going higher on a down day if you are bearish.

It just makes for a trickier market, one where the anecdotal mood is not exuberant, but  the recent fund inflows are heavy.  Those shy ETF buyers are buying and staying silent.  We had the SNAP IPO and almost everyone is negative on that stock, not something you usually see at a top.

So there are mixed signals, you have heavy inflows into the ETFs, after a big rally, which is usually negative, but then you these other factors which show that the rally can go.  Nothing easy here.

Bonds continue to act heavy, going down with stocks yesterday.  Fed funds is now pricing in about 80% chance of a hike.  I think almost every analyst was expecting a June rate hike last week, now they are scrambling to adjust their rate hike expectations.  With that comes a lot of bond selling.  Plus you have lots of Treasury supply coming on next week ahead of the nonfarm payrolls report, and you have a lot of traders wanting to get out ASAP.

Lastly, when permabulls that come out on CNBC suddenly expect a correction (Tony Dwyer, Tom Lee, etc.), like they have so far this year, pay attention.  They are usually wrong.  Even though these guys have been right being bullish for all these years, they are not smart money.

Big Fat Bubble

It must be like shy Trump voters.  Now it is shy SPY buyers.  You don't hear too much from them, at least not on Twitter or Stocktwits.  But they are piling into ETFs since Trump got elected.  This is forming without a doubt a big fat bubble.  

I gave very low odds that it would get to this.  I thought the economy was just not strong enough to get a full blown bubble.  I thought the cutting back of stock buybacks and the lack of any definitive tax plan would stall this rally.  But it is almost as if the expectation of goodies in the future is better than getting the goodies right now.  There have been no details about tax cuts yet, despite Trump promising something "phenomenal".  Even if he proposes a phenomenal plan, it won't be easy to get it through Congress.  There is a lot of resistance to the border tax, and a little bit of hesitation to go full blown GW Bush and do it all on the no money down Treasury credit plan, blowing out huge deficits.  

But the details and uncertainty haven't mattered.  The crowd seemingly can't wait.  Lately, you've had a return to big inflows at the first of the month, the automatic fund allocation money that is pumped in at regular intervals.  That is what happened in a big way yesterday, and all those scarecrows who had to wait for the all clear sign after the Trump speech bought like mad men.  I tried a short intraday to fade the move and took a loss.  I will try again, but will wait for a better spot, probably next week.  Rarely do you see such a big up day after having already gone up so much over the past 3 months.  Yesterday's up day is more typical of a rally coming off a bottom, not a move to new all time highs.  

It is a different market.  You have bubble dynamics now.  Weird, unusual things will happen.  Like yesterday.  This is the final phase of the bull market.  It is usually the shortest, but still several months in length.  I would say that Trump's election kicked it off.  Now we are closing in on the silly, irrational part of the rally.  There will be lots of potential profit for shorts this year.  The fatter this bubble gets, the bigger the potential.  But shorting this part of the move will seem the scariest, even though it can be the most lucrative.  I will have to come up with a game plan to attack this bubble, and it will probably be in both stocks and bonds, and perhaps options.  It is getting more and more interesting as this thing goes higher.  

Bonds got crushed yesterday.  We are pricing in a March Fed rate hike, and bonds can selloff for a few more days till they find value buyers willing to hold bonds into the FOMC hike.  That level is probably closer to 2.5-2.6% 10 year zone.  That should prove to be an attractive area to buy some bonds for an eventual S&P correction.  An elusive correction indeed.

Trump Passes But Fed Looms

For those who have been at this game a long time, you have to think along with the crowd, and put yourself in their shoes.  Even though I usually think differently, you always have to be thinking about the motivations of others, not your own motivations.  Once you can game their actions based on those motivations, then you can be one step ahead, and "mentally" front run their orders, so to speak.

The crowd was a bit nervous about this State of the Union address by Donald Trump to Congress.  You could see it in the mid day pullback yesterday.  But when you set expectations so low for an event, and a fairly meaningless event at that, then it usually becomes a buy the news event.

Trump managed to jump over a midget hurdle last night.  Many were expecting a repeat of his gloomy inauguration speech, but he was more election night Trump than inauguration Trump.  It is all meaningless in the long run.  But in the short run, stocks run on sentiment, and overall, he beat those low expectations I mentioned yesterday, and equity investors have one less thing to worry about.  Thus the higher prices in pre market.

But what really caught my eye yesterday was what happened ahead of the speech.  Bill Dudley came out and basically told the market that you should price in a March rate hike.  He was trying to communicate that barring some really weak economic data or a crash in the S&P, you will get a rate hike in March.  Fed funds futures show March rate hike odds of 80% now.  That is almost automatic rate hike territory.  With the S&P 500 surging higher recently, that was the last straw as far as the Fed was concerned for March.  Look for Yellen and Fischer to come out hawkish on Friday to set the market up for a March rate hike.

On the one hand, it does surprise me a bit that the Fed is trying to beat analyst expectations, most of which were predicting a June rate hike, by hiking in March.  They almost NEVER do that.  They have almost always lagged market expectations, tapering slower than expected, hiking slower than expected.  This is maybe the first time since 1994 that they have actually tried to get ahead of market rate hike expectations.

This has caught some bond market bulls off sides today.  You can see it in the short end of the yield curve, taking a pounding today.  The 5-30 yr spread is flattening now down to 105 bps, which is near the lows since 2008.  While one rate hike in March is not going to make a big difference in the long run, it does show a new side of the Fed that we haven't seen in over 20 years!  A Fed that wants to show the market that it is no longer going to sit back and let the stock market rip higher.  Also, it would be a subtle FU to Trump, who wants the stock bubble to get bigger.  That is if the Fed hikes in March.  I think they will now, just because of how strong the S&P is.

We are getting closer to a good spot to short, now that we have the scarecrows back in the pool after the Trump speech.  The growing probability of a Fed rate hike in March is going to keep a lid on the market for the next couple of weeks.  It is very possible to see stocks and bonds go down together later this week / early next week.