Too Good to be True

It just seems too obvious to be short here.  Being given so much time to short at high levels, too much data to prove that the right side is the short side.  My trading gut would be giving me ulcers at this point, as the fundamentals collide with the gut feeling that there will be another WTF moment in the SPX, where the phoenix rises from the ashes AGAIN, and the bears and reluctant investors are left behind, pounding sand. 

Yes, the gut with ulcers tells me that the bears will snatch defeat from the jaws of victory.  This doesn't change the long term fundamentals of this market, which is driven by valuations, earnings growth, and interest rates.  Valuations are extremely negative for stocks now.  Earnings growth is a moderate negative.  Interest rates are a moderate positive.  That is the fundamental side. 

The technical side doesn't match the longer term fundamentals.  The stock market trades a lot stronger than it should.  And the only plausible explanation is the huge plunge in global interest rates in August, which has acted as a support system for the weakening fundamentals and news flow in the stock market.  But that support system only works because the Fed is cutting rates before the coincident economic data is getting bad.  They will not cut rates for too long if the data doesn't get noticeably worse.  So there is a limit to how much lower interest rates can go in a non-recessionary environment. 

To get a 10 year yield to 1% or below, will require recessionary economic data in the US.  And since the 10 year is already below 1.5%, the support system, pre-recession, is mostly used up. 

The reason the SPX can stay afloat at such high valuations is because pressure on the financial system from a weakening global economy has been relieved through much lower interest rates, but that release valve isn't an infinite source of support.  Once rates go down, that monetary "stimulus" is used up, and reflected in the equity market. 

We've seen 3 tests of SPX 2830-2840 support in August, with negative trade headlines recession fear mongering, and each time, support held and bounced quickly towards 2930-2940.  That is a sign of underlying strength in the SPX, and it cannot be ignored.  This technical strength is not to be used for a long term investing plan, but just a short term bullish sign that stocks are acting better than most people expect. 

Also, the Eurostoxx made higher lows on the last retest of SPX 2830-2840, signs of selling exhaustion in Europe. 

Technicals should only be used as a short term tool, not something to base long term investment decisions.  Right now, the technicals are bullish.  Fundamentals are somewhat bearish, and getting worse.  The plan is to wait for a intermediate term rally, and see what the market is like at that point, and then decide how much to short.