Monday, May 21, 2018

Breaking Down Wall of Worry

This market is taking a battering ram against the wall of worry.  The US-China trade "agreement" has gotten the bulls more optimistic, even as interest rates stay above 3.00% and the dollar stays at year to date highs.  This is part of the top building process.  It takes time to turn around the big up trend from January 2016 to January 2018.  Usually a top is not a point, but a choppy period of increased volatility where strong hands sell to weaker, more desperate hands. 

The defining character of this bull market has been a market that spends very little time near the lows, and a lot of time near the highs.  All those V bottoms meant that longs had very little time to buy at low prices, and usually had to chase higher if they wanted to get long.  That has now changed.  From February to May this year, the market has traded in a choppy range, spending more time near the year to date closing lows of 2581 than the year to date closing highs of 2872.  Since the April U bottom, the market has spent a lot more time below 2700 than above 2700. 

Despite this change in character of the market, the general attitude towards stocks is that of deeply ingrained fundamental bullishness, with only sporadic bearishness based on technicals or some news headline.  That is similar to 2000.  Even in 2007, you didn't see this kind of optimism about the fundamentals.  That leaves a lot of room for investors to switch sides towards the bears. 

The stock market is in a pickle now.  It can't have strong economic growth for fear of a tight Fed, so it needs mediocre growth and hope that is enough to sustain this overvalued market and keep interest rates from going even higher.  A mediocre economy with a neutral Fed is a better backdrop for stocks than a strong economy with a tight Fed. 

I covered my short term SPX short on Friday, and am waiting for another shot to short, but will probably want to wait till at least Thursday or Friday. 

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