First Dip Bought Aggressively

As the probabilities suggested, the first significant dip of this 2.5 month rally in stocks was bought ravenously like a pack of wolves seeing fresh red meat for the first time in a week.  I expect there to be a flattening out near the previous highs around SPX 2815.  Hedge funds are slowly creeping back into the stock market to keep up with the averages, and are were probably the ones buying that dip last week.  Since the hedge funds were so underinvested for most of this rally, they weren't going to pass up on a chance to buy that dip.  Which is why the SPX shot up like a cannon off of 2725.  That was just last Friday, and now 3 trading days later, we're back to 2810.  That is a fast move that will get more investors bulled up and willing to buy the next dip. 

With each successive dip, the funds will have less dry powder to put to work and eventually this up trend should finally change to a down trend.  It is often a gradual process, so if you short too early, you will feel pain and probably won't be able to hang on for the ride back down. 

Currently there are a couple of things that need to happen before I go on bear raid.
1.  The stock buyback blackout period needs to begin, and it is about 2 weeks away. 
2.  SPX needs to stay above 2800 but below 2850.  If it is below 2800, I am not getting the ideal entry and could get shaken out on a short term rally.  Above 2850, and the topping process will be lengthened for at least another few weeks. 
3.  Risk parity has to stop working, and need to see bonds selloff when stocks rally.  So far this year, bonds have been able to stay well bid even when stocks go up.  This is the least important of the things I need to see, but it is a factor.

Addicted to Stimulus

The US economy is touted as being the best economy in the world, and it is valued like it, with a huge chunk of the total market cap of global equities.  But could it be just because the US has grown the biggest debt pile in the world and used that to pump up its economy more than others for the past 2 decades?  Sure, there are better demographics in the US than in Europe or Japan.  But the US has had much bigger budget deficits as a percentage of GDP since 2008 than Europe.  It is almost as big a percentage as Japan, which needs the big fiscal deficits to offset the lack of demand from an aging and declining population.  

The US government is addicted to tax cuts that don't pay for themselves, and deficit spending.  The electorate don't really care about deficits, they just want their entitlements, handouts, and tax cuts.  Now the Democrats are probably going to use the same playbook as the Republicans, stimulate with big budget deficits and pump up the economy and make people happy.  But what Democrats plan on doing will be more powerful and inflationary, euphemistically called MMT, basically running up huge deficits by giving out money and spending it like completely drunken sailors instead of the Republican playbook of big tax cuts and increasing spending like slightly drunken sailors.  

All the fiscal stimulus started in early 2018 is still going to work in the US economy, providing an economic backstop for any market weakness related slowdown.  In order to get a sustained selloff that lasts more than a couple of months, you will need to see the US economy roll over.  The EU and China rolling over is not enough.  Their stock markets are not big enough to cause a reversal of the wealth effect when their stocks go down.  The US stock market is the elephant in the room.  The market cap of US companies is over 40% of the total world market cap of publicly traded equities.  You need to kill off the US stock market to cause the wealthy to cut back on spending and for corporations to cut back on buybacks.  Since the US stock market is so overvalued, near the top of valuation percentiles in its history, you can get a nasty selloff just based on the reflexivity of lower prices causing corporation to cut back on buybacks and for wealthy investors to reduce consumption.  The valuation support isn't there to provide a floor at anywhere near these levels, which is why you saw such a steep selloff in December when investors came out to sell.  

The current 2+ month rally in stocks is investors and corporations coming back into the pool, thinking the waters are safe, when in fact the sharks are just taking a break and going to come back even hungrier at a later date.  The more this eventual selloff is delayed, the worse the drawdown will be.  Unfortunately, it still feels like there are still quite a few investors who are just as skeptical of this rally as me, so it will take time for those on the fence to get back in, before you can get enough selling fuel for the next leg down.  

The hope that the Fed brought to the table by freezing its rate hike campaign and likely its balance sheet reduction has given bulls a breather here.  It will not last long as the global economy has clearly rolled over and its nowhere close to the bottom yet.  China is bringing out its old playbook of stimulus, trying to pump up the debt addict with another shot of debt and reckless and unproductive spending.  But the highs are getting shorter and the crashes are coming quicker.  

The global economy is in sad shape, overstimulated, both monetary and fiscal, and with nothing to show for it except an overpriced US stock market, overpriced global bond market, and bloated real estate prices.  The only choice that politicians and central bankers will make is to keep piling on more debt and printing more money to keep Humpty Dumpty together.  The value of fiat currency will keep going down versus real assets, and they will lie the whole way saying there is no inflation.  

We finally got a bit of volatility on Monday, which is an initial sign of long saturation.  It will take a couple more of those type of days to eventually change the algo settings to risk averse and have the quants sell their stock.  With stock buyback blackout period starting in 2-3 weeks, that should be the perfect time for a bear raid to start.  I have been holding my powder dry waiting for the right time to strike, and we are almost there.  This bear is ready to come out of hibernation.