Just Got Too High

It gets repetitive to watch CNBC and Bloomberg guests point out that the recent selling was technical, and not based on fundamentals.  So the parabola higher in January was all fundamentals, and the selloff was all technicals?  So if it goes up, that is because of fundamental, rational reasons, and when it goes down, it is because of those crazy algos selling it down.  Oh, and those stupid XIV investors and volatility sellers.  Blame them too.  

You would figure that these financial analysts and portfolio managers would talk some common sense and reason after all their years of experience, but most just end up parroting each other and blurt out the same misinformed message.  It is deeply embedded in our reptilian brains to deny undesirable realities, and blame it on something or someone.  

I don't have some great insight into the market or how it behaves.  A lot of it is common sense.  If you have some of the lowest cash balances at the retail brokers and volume 50% higher year over year in January, that is a sign that retail traders are all in on stocks.  And since most retail traders lose money, it probably means most of them are wrong.  So by the principle of transitivity, going all in on stocks in January was probably wrong.  

Also, the higher stock prices get, the less attractive they are as an investment.  The market was up almost 200 points in 3 weeks, or 7% in January at the top.  That is an annualized rate of over 100%!  That is on top of 20+% rise in 2016.  And the market wasn't cheap at the start of 2016 either.  

The US stock market valuation is excessive.  That leaves this market vulnerable to big drops on no news.  It is turning into a Ponzi scheme, where new money needs to keep flowing into the system to keep it going, or it collapses.  At these valuations, you need steady equity fund inflows to keep the scheme going.  These aren't self sustaining valuations.  

All the dip buyers came out yesterday and we closed almost at 2700.  It did seem on CNBC that everyone was viewing the selloff as a buying opportunity, and not a warning sign of a top in the making.  I have a different view, and expect the market to trade in a lower range around 2540 to 2720 for the rest of February.  That means yesterday's rally got this market closer to a sell short zone.  I will be looking to put on a starter short position around 2700 today, looking for a move back down later this week.  Not interested in a long this week unless you get down towards 2600.