Wednesday, May 31, 2017

Marginal Highs then Flush

They are piling into a few large cap stocks and driving up the averages.  The Nasdaq 100 looks bubbly, but the Russell 2000 just chops around.  This happened for a couple of years in the late 90s and also a bit in 2007.  Usually Russell 2000 underperforms when stocks are going down, not up.  Also bond yields are trending lower despite rising stocks.  This has been going on for almost 3 months now.

The macro signal takeaway from this action is that the US economy is not as strong as the media advertises, so investors are piling into the few stocks that have decent growth, although very overvalued (FB, AMZN, etc).  This is very late state bull market price action.  It backs up my thesis that we are in a 2015 like environment, where the market chops around near the top and gets heavier and heavier until it eventually crumbles.

There is still room for this thing to go up a couple more weeks, perhaps as much as 2%, but the odds are favoring shorts more and more as the days pass.  Hard to pick a top in this bull, so you have to have nearly perfect shorting conditions to enter short.  I would wait for another week or two, if the market is closer to SPX 2450, then you can short with confidence, knowing that the upside will be extremely limited at that point, and vulnerable to a cascade lower.

With rates staying low, there is no rush to short here.  If the 10 year starts acting weaker, and yields go up to 2.4-2.6% area, then you could have a pullback.  If bonds act strong, you will see limited weakness in stocks as lower interest rates support the leveraged corporations.

It is a boring daytrading market but I see potential for a short in a couple of weeks.  Laying low till then.

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