Too Early = Wrong

Getting short earlier this month was way too early, so I was wrong.  But I am not giving up on the short side as the overbought extremes get bigger and the action in the hot tech names (TSLA, AAPL, MSFT, etc.) keep the market going higher while the small caps continue to lag behind.  This is reminiscent of the 1999/2000 tech bubble when the big caps and high growth names vastly outperformed everything else.  The big difference this time is the Fed is in an easing cycle, while it was in a hiking cycle in 1999/2000.  That makes this bubble more resilient than the one in 1999/2000. 

1970-1973 was another period where you had a small group of large cap high growth stocks (Nifty Fifty) leading the indices higher.  That also ended badly with a brutal bear market in 1973/1974. 

Unlike 1973 and 2000, the Fed is on the same side as the stock investors and speculators, making it that much harder to top out and transition to a bearish market.  The bond proxy names like utilities are also on fire, along with the high beta tech names, as bonds have remained strong.  So its not just the high beta stocks, but also the safety stocks that are outperforming here.  That's like an extra shield of armor this stock market has protecting it from any selloffs. 

That is why I've been keeping such a close eye on the stock/bond relationship over the past several weeks.  While the SPX keeps making new all time highs almost every day, the bond market has refused to selloff, and since the start of 2020, has managed to rally along with stocks, reliving the 2019 playbook of risk parity heaven, as stocks and bonds both went up strongly. 

The first sign of bond weakness will be the warning sign that the top is close.  We've yet to see that during this relentless rally.  There seems to be a lot of complacency not just in the stock market, but also in the bond market, as we haven't had a simultaneous nasty selloff in both markets since 2018. 

The strength in bonds has given me less conviction that there is an immediate sharp selloff, but it doesn't take away from my longer term bearishness based on overvaluation, lack of earnings growth, and a potential huge negative catalyst in the Democratic primary and later on the November election. 

Lastly, I know the latest news headline is the China coronavirus and fears of a pandemic.  I am sure if it gets really bad, China will do its best to cover up the severity of the problem so you probably won't know about it for several weeks.  There is a very small probability that if it starts spreading everywhere, you will get a big fear based selloff, focused on Asia, but the US trades like its an island unto itself anyway so in that scenario, I don't think it has lasting effects, it will just be a big dip that gets bought up. 
Most likely, this coronavirus gets less prevalent and is forgotten in a few weeks.