Above 26,000 Feet

We have now reached the "death zone", above 26,000 feet, where the air is too thin for long term survival.  An area where trivial tweets can cause out of the blue selloffs.  Yesterday, it was another maybe? tariff threat tweet from Trump.  When the oxygen levels are this low, the body collapses under the weight of even the most insignificant bit of news. 

After a 4 week pullback, the SPX bottomed on June 3, which was 6 weeks ago.  That is in the general 5-6 week time frame where rallies end and stall out.  Another ominous sign is the psychological break of the 3000 level, which pulls in more bulls to fall into the trap door lower. 

The biggest negative for the current stock market is the recent weakness in bonds despite a super dovish Powell last Wednesday.  Yes, the invincible bond market is finally showing signs of weakness as the recent economic data has beaten expectations.  It is not hard to guess why recent economic data is coming in stronger.  When you have simultaneous face ripping rallies in stocks and bonds for 6 months, the wealth effect is going to be double what it normally is.  That is finally seeping into the data.

As I have stated before, the economy is in a zombie-like steady state of low growth, the only thing that changes in this new economy are financial markets, so they are the only thing that matters.  Employment numbers, inflation, retail sales, etc. are not barometers for the new economy.  The new economy is the S&P 500 and bond yields.  The higher the S&P 500, the better, and the lower the bond yields, the better. 

There is no more dynamism in the economy.  The central banks have printed there way to a steady state condition, where the lack of meaningful down cycles mean that there is not enough pent up demand for big up cycles.  So the economy flat lines, with central banks feeding it more and more drugs to keep the dying patient alive. 

We are getting closer to the end game for this bull market, as the drugged up economy can't generate more growth unless you get even more massive deficit spending (1 trillion is not enough) and even lower rates (2.1% 10 year is not low enough).  On the fiscal side, there is not likely to be a fiscal stimulus until at least 2021, when we find out who the next President is, and betting markets are giving higher odds on it being a Democrat.  As for even lower rates, I don't see the 10 year yield going significantly lower unless you see an earnings recession, which means that stocks are going to be in trouble anyway despite lower rates. 

While I would like to see more optimism among the investment community to make it a slam dunk short at current levels, there are enough negative factors to overwhelmingly support the short side here.  Macro hedge funds have more long equity exposure than average which is always a good sign that there is almost no upside left. 

A few more days of slow trading will be enough to convince me to enter a short position.  I have waited longer than usual just because of the strength in bonds, and that now seems to be ending.  So I have my trigger finger on the sell button.  I plan on entering a short before the July 31 FOMC meeting, which will probably be 25 bps and be disappointing for both stock and bond markets.