January Bear Raid

We got the oversold bounce last week, as a lack of bad news and with most of the big players gone, pension fund rebalancing was able to squeeze shorts into the close and get the market to a more neutral level. 

I am bearish for January as I expect economic data to start coming in weaker and more earnings bombs like Fedex coming down the pipe for later in the month.  While there may be a bit more of a bounce going into the first few days of January as asset allocators come back and add equities, the force of the fundamentals will eventually come to bear on this weak market.

I have seen a lot of articles and CNBC guests saying that the economy is still strong and will only slow down a little for 2019.  That is counter to what the stock and bond markets are saying.  I am hearing things like there will be no recession and that markets are panicking and being irrational.  This only tells me that many investors are still in denial and poorly positioned for 2019 equity weakness.  When the economic weakness is more obvious, most of the down move will already have been made, and it will be too late to short stocks. 

This game is about forecasting what will happen based on fundamental and market analysis, not looking at data in the recent past and extrapolating that into the near future.  I've seen a lot of statistical studies that say that in the past, under current oversold conditions, the market went higher 90% of the time.  They forget that the sample is curated from mostly a roaring bull market, or at the very tail end of a bear market. 

Don't forget the S&P was at an all time high less than 3 months ago.  Robots and quant strategies can adjust to current conditions much faster than humans, who still are framing stock price behavior from a bull market perspective.  Thus you get traders quickly embracing any rebound as a tradeable rally, like CNBC Fast Money on Friday, when in fact most of the rally is over with and quickly about to turn back to more selling. 

I have sold the remaining long SPX position today on the gap up off the Trump trade deal optimism and will look to short any rally in the coming days.  Anything around SPX 2525 on the short side should provide a good risk reward. 

Happy New Year and Good luck in 2019!