Thursday, March 2, 2017

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.

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