Monster in Waiting

The higher it goes, the harder it falls.  It has been a flabbergasting move higher on US China phase 1 trade deal headlines, repeated in various forms over and over again, yet still able to spike the futures higher whenever they hit the wires. 

This feels like the most extended relief rally on a nothingburger deal that will be meaningless after November 2020.  Learning from experience over the last 10 years, it is better safe than sorry in shorting the SPX.  One must be very careful picking spots to go short, because there is a big mental and financial cost for being too early to short, as one bleeds losses as the indices grind higher day after day, testing one's will and belief in the bigger time frames. 

I usually lean bearish, but I also realize that there are certain seasonal patterns that usually play out, such as November and December being bullish.  And the massive amount of equity fund outflows this year due to trade war and even recession fears also made it less likely that you would get a sustained selloff.  As you all probably know, the significance of the US/China trade war is blown way out of proportion and with the huge budget deficits that the US government is running, the odds of a recession are much lower than Wall St. thinks. 

But with the SPX at all time highs and at nosebleed valuations, you don't need a recession, or even much of an economic slowdown to make the market go down.   Just the uncertainty of the 2020 presidential elections would be enough to weaken the market next year.  As I mentioned before, the fear of a potential President Elizabeth Warren is real, and its not a baseless fear like most things on Wall Street.  This is a very real negative catalyst that could easily send the SPX into a bear market.  Especially if the Democrats could somehow be able to hold 50 seats in the Senate, which would allow them to use the nuclear option to pass tax hikes on the rich, corporations, and of course the much talked about wealth tax, which is making the billionaires howl in horror.  Paradoxically, the more the billionaires complain about a wealth tax, the more popular the idea will become with the general public, who realize how out of touch the rich are with the other 99%. 

We are setting up the perfect storm when you get investors excited about some measly tariffs getting canceled as the Democratic primary season will be all you hear about over the first half of 2020.  And that is a huge cloud hanging over this market, and it will be the only thing that investors think about starting in 2020.  I am already getting excited for what should be a monster short coming up. 

But I don't want to jump the gun, who knows you desperate the fund managers will get chasing performance into year end, and you have the biggest slug of corporate stock buybacks over the final 2 months of the year. 

The put call ratios have been extremely low this week, and is a sign that investors are throwing caution into the wind and getting greedy.  I see limited upside from current levels, but also due to the buyback support over the next several weeks, limited downside.  It should be a low volatility grind for the rest of the year, setting up a volatile 2020.