Bulldozer Closing In

The dip buyers are still actively picking up dimes in front of the coming bulldozer.  Even though I believed that the dip on Thursday/Friday would be bought, I couldn't pull the buy trigger just because of the weak backdrop for stocks in the current environment.  Declining year over year earnings growth, high valuations, and newfound optimism on emerging markets that is based on dollar weakness hopes, not realities. 

The fund managers haven't been actively adding equity exposure this year according to reports, but I get the sense that they will start doing so slowly over the next few weeks.  The quant funds are usually the first to buy the rebound, then come the active managed funds, and then when the up move is over and starting the downtrend, retail comes in to buy "cheap".  I expect a repeat of this base case scenario over the next month. 

Unless the markets trade more volatile and there are more opportunities, I will refrain from making unnecessary blog posts.  As the market has slowed down and become less favorable, I've reduced my blog posts about the current market.  At a later date, I may write a few posts about trading in general, when I find the time and motivation to do so. 

I've noticed over the years since I have written these posts on the market that they affect my trading, and sometimes for the worse.  The more I post, the more I seem to overtrade.  Overtrading is fine when it is a favorable trading environment, but if its a one way train, its best to just get on the train and hang on, or stay out of the way. 

I do sense a longer term opportunity brewing but I will be patient in putting on the position.  Needless to say, it is on the short equity side.  In the meantime, I am waiting for more concrete signs and rumors of a US/China trade deal, which should put a local top in the emerging markets and set up a long ride down. 

White House Boiler Room

The Trump crew must be making a fortune trading in their anonymous offshore corporate accounts. You don't think Wilbur Ross wasn't short stocks/long puts when he said US and China are miles apart?  You don't think Kudlow wasn't short when he said yesterday that US and China are a long ways from making a deal, and that Trump wouldn't meet Xi? 

And you can bet they will load the boat with calls before they announce the trade deal.  The White House has turned into a boiler room.  Instead of pumping and dumping worthless penny stocks, they are pumping and dumping the US equity indices, with leverage. 

Back to the market.  That was a heck of a selloff, first gapping down and then running lower on doubts about a trade deal by March 1, and of course, the now routine last hour rally into the close.  As I am writing, we are trading at the levels right after the Powell pop on the dovish Fed announcement last Wednesday.  But bond yields are lower despite the SPX going nowhere since then. 

Bonds have stubbornly been strong despite a near relentless rally over the last 6 weeks.  And many traders are catching on, as I am seeing more fund managers and analysts calling for lower yields this year.  I agree, but I don't expect yields to go lower in a straight line, unless you start seeing SPX go back to a downtrend.  This is about the extent to which the risk parity trade can work, with both higher stock and bond prices.  This is because higher SPX levels than what we saw this week will ease financial conditions and slowly pressure the Fed to back off their dovish talk and regain their optimism about 2nd half economic growth. 

I do expect growth to slow more than most people expect, but this face ripper rally this year globally will probably delay the inevitable recession by a couple of months.  The real economy doesn't matter anymore.  The poor and middle class are constants, in a perpetual state of stagnation.  Its the rich that are the variable here, because their fortunes are tied to the financial markets, and those things are bloated and vulnerable.  When the rich feel the pain, the economy will suffer.  The poor and middle class are pawns in the economic game and are easily sacrificed without any meaningful damage.  More than ever, the rich are what matter in this finance-based  economy.

No strong conviction on the next move, but I am leaning towards a rally next week as based on the data I am seeing, hedge funds are still very underinvested and will support the market on dips for at least a few weeks.   

Relentless Buying

The market was looking for any excuse to rally coming off of the December 24 capitulation, and a super dovish Powell has done the job.  The rally looks like it is near the end point here, as we approach the 200 day moving average at SPX 2740, as there is trade deal optimism and now assurances from the Fed that they will be "patient". 

It has been 6 weeks since we've made the bottom, and that is usually when the FOMO and short squeeze fuel runs out and you start getting more choppy trading action.  The market doesn't trade like it used to, when there was less systemized trading and more 2 way trade in uptrends and downtrends from active fund managers. 

With the decline in assets of the active managers, passive management has taken over.  Passive investing flows take away a lot of the short term counter trend moves and you get huge, one way moves both up and down.  How else can you explain the 10 straight up days from 3:15 PM to the close?  Those are passive ETF money flows getting put to work. 

I have still not put on a short position, as I was waiting for more definitive news on the US/China trade deal.  It will get done, and almost everyone thinks so, which will make it an obvious buy the rumor, sell the fact event.  The current prices around 2730 are a good place to put on initial short positions, with intent to add more short if it goes higher.  I have been patient putting on shorts, just because the up trend has been so strong and the stock buybacks are coming into the market in full force now as the earnings blackout period ended for most companies this week. 

The US stock market definitely doesn't die easily, and it will probably take at least a month of choppy trade to form a top.  With the lack of earnings growth, the fundamentals will be working against the market, especially at these levels.  When it does go back to a downtrend again, it will get nasty.