Unorthodox Rally

Been quietly observing the markets and this bull run off the Dec. 24 low has been powerful and stunning.  I have not been short, as I mentioned in my last blog post a month ago, if the SPX went above 2850, the topping process would be extended and take longer time to play out.   The next few weeks are safe, even though we are in stock buyback blackout period, because the window for a selloff is closing, as the market rarely drops big during the middle of the earnings season, especially when it has been in a strong uptrend leading up to it. 

This has been one of the most unorthodox rallies that I've ever seen.  An overvalued market with the economy clearly slowing, as the earnings revisions have been revised lower and the global economic data has come in weak for months now.  So bonds have been strong, and the defensive sectors like utilities and consumer staples have been leading, with cyclical stocks lagging.  That started to change in March, as the reach for beta was on, and tech stocks have been relatively strong since.  

This market is latching on to Chinese stimulus hopes and anticipation of a 2nd half rebound, ala 2016.  You see more bullishness about emerging markets than the US, even though the US is where the supply demand fundamentals are most favorable, due to the buybacks.  

I just don't see the pent up demand to lead to a 2nd half rebound as the US economy has been overstimulated and the secular growth weakness from low population growth and income inequality are only getting worse.  What the last 2 years has been is a huge distortion of the stock market cycle with a massive money drop to corporations used to fuel stock buybacks, keeping US stocks well bid.  Perhaps it will take a Democrat to win in 2020 for a change in corporate welfare policies and more regulation to keep corporate profits under control. 

I am getting more tempted to start a short, but I think its better to be a little bit late than to be a little bit early putting out my line.  What still bothers me is that CNBC Fast Money is still not really buying into the rally, and based on data that I have reviewed over the past couple of weeks, hedge funds are positioned heavily in cash and have been mostly sitting out this rally.  Usually, you need hedge funds to be more fully invested before a big waterfall decline.  So I don't see a big down move anytime soon, until the hedge funds start loading up, which they probably will if the market just chops back and forth in a few percent range over the next 3 months.  Then you will be set up for a big plunge.  At the same time, the fundamentals are horrid so unless another bubble gets going, I don't see how this market can go much above SPX 2940, the all time highs. 

It is going to probably be a boring couple of months of tight range trading coming up, but that should set up a nasty surprise for investors in the 2nd half.