Trump in Trouble

We are in the choppy topping period of the market.  The feel good up days don't last for long, and then the gloomy down days come and those also are reversed quickly.  We are stuck in a range, and it probably lasts until the phase 4 fiscal stimulus bill is passed, which looks like late July.  A battle of earnings fundamentals vs. liquidity. 

Investors are not buying because they think there will be a V shaped recovery.  They are buying because they believe the Fed will backstop the market along with the Treasury looking to pump more fiscal stimulus into the economy to help re-elect Trump.  And those Trump re-election hopes are getting slimmer with each passing day. 

Trump re-election hopes are turning into a dumpster fire.  It is laughable to think he has some grand plan to get re-elected, as some have conjectured.  Occam's razor applies here.  The simplest and most direct explanation is most likely to be correct here, which is that Trump really isn't that smart, has poor political instincts, and just acts the way he always has, and got lucky in 2016.  The guy hasn't changed since he's been been known to the public.  And he's not going to suddenly change in the next 4 months and become more electable.  And even if he tried, the opinion on him is pretty much solidified, either you like him or you hate him. 

Fame goes a long way in politics, it is what got Trump elected over Hillary in 2016.  Going up against an unpopular female candidate was critical, as there is clearly a bias against a female president in the U.S.  If Trump had to face Obama in 2012, he would have lost.  But according to many, especially on Wall St., until the last few weeks, the overriding belief was that Trump was almost unbeatable in 2020 because of his handling of the "economy".  Well, those economic arguments are going straight to the garbage can.

You can blame the coronavirus, but a crisis like that is handmade to boost popularity among leaders.  Globally and in the US, politicians got big boosts in popularity after the pandemic, including Trump.  But Trump's bump up in the polling numbers was small compared to others, and its faded fast. 

When it comes to the pandemic, he has a much tougher job than any European or Asian political leader.  Americans are less obedient than Europeans, who are much less obedient than Asians.

When it comes to valuing personal freedom, the US is high on the list.  In a spectrum of importance of personal freedom among citizens, it would be something like this:  US >> Europe >> Asia.  That's why you have so many oppose wearing masks in the US even as the coronavirus cases remain high.  The Europeans are less opposed to wearing masks, and at the opposite end of the spectrum, the Asians absolutely feel like it is a necessity to wear them even though the new virus case numbers are quite small. 

So predictably, even a less densely populated country like the US compared to European and Asian countries are seeing an explosion of new cases.  When half the population doesn't believe in wearing masks and feel its a violation of their freedom, then the consequences are more cases and more deaths. 

Apparently, throwing a huge amount of money at the coronavirus doesn't make it go away.  You actually have to have a population willing to contribute to the virus not spreading.  And clearly, that's not the US population. 

That is probably why you will continue to see Covid worries in the market until an effective vaccine has finally been mass produced, which is looking like it won't happen for another 12 months.  

Paradoxically, the surge in new virus cases in the US could be a blessing in disguise for the stock market.  It probably guarantees a bigger phase 4 stimulus package in July.  And really, the stock market could care less about a few hundred thousand extra deaths or the high unemployment rate as long as the stimulus gravy train keeps coming.  

That's why you aren't seeing a bigger dip in the market even as the virus doesn't go away and surges in the southern US.  Its because of the stimulus hopes which are alive and well.  

What the market does care about is who is in the White House for the next 4 years.  And if its Biden, then post tax earnings are likely to go down substantially. 

The post phase 4 stimulus timing should line up perfectly with the pre-election market angst that should be quite high as Biden is crushing Trump in the polls.  If these poll numbers remain into November, Biden is potentially looking at getting over 400 electoral votes, more than double Trump, in a landslide victory.  

Republican strongholds Georgia and Texas are now polling slightly in favor of Biden, and the battleground states like Florida are polling heavily in favor of Biden.  This is a huge warning sign for the market, as a Biden presidency will likely raise corporate taxes and increase taxes on the rich, a double whammy for the stock market.  But those worries are in the back burner, usually markets wait until about 3 months before the election to start focusing on it.  So that would be August. 

I have covered my SPX short position in the overnight market.  The game plan is to just ride this wave for a few more weeks, at which point I will just stay short for a much bigger move.  Right now, its not a time to look for the big move lower.  Only when the final big positive catalyst is behind us (phase 4 stimulus), will I feel more comfortable holding a long term short. 

A New Era

Most investors will agree that the market is overvalued.  A recent survey by BA Merrill Lynch stated that 78% thought the market was overvalued.  But they think the market will go up because of the Fed and all the liquidity, and they think they can get out and sell to the greater fool.  Yeah, its become the greater fool theory for stock investing now. 

These stock valuations are justified by low bond yields, they say.  As if Japan and Europe don't have even lower bond yields, and yet their equity markets are cheaper.  So there is a big hole in that theory.  New ways of rationalizing a very expensive market with deteriorating earnings.  Earnings yield being much greater than 10 year Treasury yields.  So in theory, if rates go to zero, stock valuations should go to infinity.  Why hasn't that happened in Japan and Europe? 

New era thinking in the stock market always arises after an extended bull market.  You saw that in the 1960s and 1970s with the Nifty Fifty stocks that were going to take over the world with all their conglomerates.  Then you saw the biggest stock bubble ever, in 1999-2000 when technology was so great that it justified a huge premium over other sectors. 

You are getting that now with the SaaS stocks and the Big Five:  MSFT, AAPL, AMZN, GOOG, and FB.  It's almost as if the pandemic just proved that these stocks are invincible, and thus justify and even higher earnings multiple.  Its almost as if these companies don't rely on business investment or correlate with the macro economy.  They are treated as islands, safe havens in the storm of the normal business cycle.  Or maybe some of these investors think that the business cycle has been eliminated by the Fed, and its now a permanently high plateau. 

I guess I am too old fashioned, like Warren Buffett, and still think that these loved tech stocks are cyclical companies, and that their valuations are ridiculous. You have new guys in the stock market thinking they own the place, like Dave "Davey Daytrader" Portnoy, who suddenly is the most famous stock trader in the world.  And he picks his stocks using letters from Scrabble. 

About the Fed liquidity argument for justifying high stock market valuations, let's look at China, who's M2 money supply has gone through the roof over the past 25 years, and what the Shanghai Composite has done over the same time period:

China M2 from 1997 to 2020 (up ~2000%)

Shanghai Composite from 1997 to 2020 (up ~140%)

So obviously the correlation between money supply growth and stock index levels is not that high. In China, money supply growth is about 10 times stock index growth over the past 23 years.  All the money has gone to real estate, not equities. 

I can picture a similar scenario in the U.S., where most of the money that is printed by the Fed ends up in real estate, which is a hard asset, rather than a soft asset, like stocks which is overvalued and also subject to earnings manipulation and accounting trickery, which is quite commonplace now.  Also, if stock valuations stay high, I can definitely see a lot more equity supply coming out to feed the ducks. 

Contrary to what many think, the best investment in the US is real estate, not stocks.  They are not building enough starter homes to meet the demand, and last I checked, the US population is one of the fastest growing populations in the developed world.  So the demand will be there.  New supply is constrained by the lack of land in good locations near the big cities. 

If the Fed keeps printing money like it has this year, which is the most likely scenario, I can definitely picture the SPX going into a long sideways to down market and real estate prices keep going up. 

During a few of the trading days last week, we had sudden SPX dips intraday on news of growing coronavirus cases in AZ, TX, and FL.  In the past, these sudden dips that recover are an omen of a bigger move lower.  Its like a boxer throwing body punches and while they don't result in a knock out, they wear down the opponent and set up a knockout for the later rounds.  Those sudden dips that you saw last week and even this week overnight on Monday and Tuesday are like body punches.  They accumulate and wear down the bulls.  Even though we've gone sideways for the past few days, the market has softened the belly of the bulls.  In these cases, usually a knockout punch to the head is coming soon after. 

Manic Daytrading Times

Historically, on a spectrum of liquidity vs price efficiency, it would be something like this, from most liquid and efficient to least efficient.  

Forex  >> Bonds >> Commodities >> Equity Indexes >> Large cap stocks >> Small cap stocks

That spectrum is still valid now, but the gap between the large cap stocks and the small cap/micro cap stocks has gotten much wider.  It is the Robin Hood daytrader effect.

Like many traders, I started off investing in stocks which became daytrading in stocks.  And eventually, some of those stock traders become futures traders.  The main reasons one would go from stock trading to futures trading is to be able to trade with higher leverage, trade short term with large size, and to be able to trade overnight when the stock market is closed.

But there is a tradeoff from going from stocks to futures.  Futures markets are more efficient, and the edges are much smaller than stocks, especially small cap day trader dominated stocks.  During stock market bubbles, the liquidity in the small cap daytrader space goes way up while the price efficiency goes way down, which makes it much more worthwhile to trade.  This is one of those times.

We are in a stock market bubble.  Unlike past bubbles, it is happening in a time when the economy is really weak.  It defies comprehension, but maybe an 11 year bull market finally has seared a lasting memory into the brains of some investors, most who happen to be millenials, making them believe that the stock market only goes up.  It has encouraged them to buy stocks and call options with reckless abandon. 

It reminds me of the bubble in 1999-2000, when a lot of fresh faces came on to the trading scene amid the lure of fast, easy money.  Daytrading firms were popping up everywhere, and newbies were dreaming of riches as they bought and sold some of the junkiest and overvalued stocks out there.  A good book which describes that era is Scam Dogs and Momo Mamas.  It was quite a time to be daytrading stocks, with so many wild and irrational price moves.  Although we are not at that scale, and unlikely to ever get to that epic level, the speculation is quite overboard. 

Another period that this reminds me of is the poker boom from 2003, which lasted about 10 years.  In the early stages of the boom, you had a lot of new poker players who had no idea what they were doing and were losing money quickly to the professionals at the table, both online and brick and mortar.  The games were wild, and easy to win, if you had a basic understanding of poker and probability.  But as the years progressed, the flow of new poker players slowed and the ratio of fish to sharks got lower, making the tables tougher to win.

We are in a similar situation now with daytrading.  Google searches for daytrading are at an all time high.   A lot of newbies have entered the stock market and have no idea what they are doing.  This is resulting in irrational and excessive moves in speculative stocks every day.  We have bankrupt stocks like HTZ and CHNR going up 500%, with most of the buyers coming from brokers like Robinhood, populated with traders who are new and clueless.  They get their trading ideas from chat rooms, Twitter, message boards, etc.

On Robinhood, they started with the beaten up blue chip household names, like Ford and GE, migrating to the airlines and cruise stocks.  Now, they are going further out on the risk curve, focusing a lot of their activity in speculative small caps or outright pump and dumps based on "themes", the black stocks (UONE, UONEK, CARV, BYFC),  the coronavirus stocks (SRNE, XSPA, NVAX, VXRT, too many others to list), home entertainment stocks (GNUS, CIDM), riot stocks (VISL, DGLY), electric vehicle stocks (IDEX, NIO, NKLA), etc.

In the past, you would rarely have a stock go up over 100% in a day, much less 200%.  Nowadays, 100-200+% daily moves up in stocks are commonplace.  500% moves up in a month.  These are internet bubble 1999-2000 type of moves.  And its not just 1 or 2 stocks doing this.  Its multiple tickers going crazy each morning on either chat room pumps or hyped up press releases.

Pretty soon at this rate, you will run out of new small cap stocks to pump up since so many have already been pumped and dumped.  So what's been happening is stocks that have been pumped and dumped a few weeks earlier get re-pumped again, and the daytraders, who all think they can get out for a profit before the dump happens again end up spiking the stock, but usually the second or third pump doesn't last for long, with all the bagholders left from the previous pump and dump looking to get out.

These crazy irrational markets don't last for long.  Eventually, the flow of newbies slows down and the ones that have been in the market for a few months either have been gobbled up by sharks or wisen up and change strategies and stop chasing garbage pump and dumps and bankrupt stocks.  It is stock market Darwinism, the fish don't last for long in a shark infested sea.

The winning strategy in this type of stock market is to do the opposite of the Robinhood traders.  But you have to let the Robinhood traders go overboard and push prices to levels where the pendulum has swung too far, and take the other side, by shorting.  Remember, rookies only go long.  The pros go long and short.  This is where experience and intuition helps with timing entries.  The exits are less important, and can be less time sensitive.  The truly great prices to short don't last for long, so timing the entries is the most important factor in profitability.   The hardest part these days is actually getting the shares to borrow to short, as most of these stocks are hard to borrow. 

Recently, my focus has shifted from futures to stocks because the stock market is teeming with opportunity.  Still trading futures, but now more of my energy is going towards stocks.  When the fish are plentiful is the time to spend all day fishing.  These are once in a decade type of markets in stocks, and they usually only last for a few months. 

Trading is not about making a steady income throughout the year.   It never has been about that.  It is about making as much money as possible when the opportunities are plentiful, and losing as little as possible when its not.

Here is from a past blog post:

In general, it is better to focus on trading individual stocks in a bull market and trading the indices/futures in a bear market.  Some may disagree, but it is a good habit to look for new markets to trade, to find pricing inefficiencies and patterns in places that are less familiar.  That way, if you can find edges in more markets, it gives you more opportunities, which is helpful in slow markets like this.

This reminds me of a past post, where slow times reinforce the need to make as much as possible during active times:   Feast or Famine

It in times like these where I am reminded of the importance of making hay when the sun shines.  You absolutely have to kill it and be greedy when the opportunities are there because once they are gone, it will be hard to make anything when markets turn bad/dull/unpredictable.  A good post on Elite Trader made in August 2007 (a GREAT trading market) that still sticks in my memory:

jdeeZERO05: can't ask for more volatility than this. I crushed my profit target already, i'm going to the bar. this fucking rules.

RM: Quitting early after a big gain is the second worst trait a trader can have. No offense, but you'll never be rich.

jdeezero05: have fun giving back your profits, not my game.
...
to me it makes sense to learn to crawl before you even attempt to fly. 20 YM points a day is my goal. When I've hit that I'm done. If i got a hundred on the week I've been done. 15 point stop, if I get down 40 points on the day i'm done. 120 points down for the week, i'm done for the week. Haven't had that happen yet with this style management yet though. 5k account, 1 car. This morning though, I rode the trend, tried to jog for the first time. Could be done for the week if I want. The remainder of this week has no emotion at all. Market is going to have to entice me with the highest probability setups I can get to risk what I made today, all the pressure is off now on the week.

To me this is exactly why most traders fail. Good look getting "to the moon" when you can't even crawl without falling on your face. Not saying thats your situation, but giving me that advice is just shit advice, no disrespect.

RM: A surefire recipe for permanent piker status if I ever saw one.

For some reason I'm in the mood to do you a favor and take the time to explain what you're doing here:

My job is to collect strands of beads off the streets of New Orleans. I need to collect 500 strands every year to make a living, so I figure I just need to collect 10 strands every week.

The past few months have been tough- I've had to work pretty hard to collect my 10 strands/week. However, this week is Mardi Gras, so there are currently beads all over the place for the taking. The streets are flowing with a massive bounty- beads are literally everywhere! I've already managed to collect my 10 strands within the first five minutes of Mardi Gras week. This is great! I've already made my weekly quota, so naturally I'll now be taking off the rest of the week. Beads crunch under my shoes during my walk home, but I don't bother to pick them up. Why should I bother? After all, I already have my weekly quota in hand, so the pressure is off. Time to hit the bar!  

Don't be that guy who makes his $1,000 in an epic trading market, takes the rest of the day off, instead of making $10,000 by trading the whole day.  That same guy will try to squeeze $1,000 out of a brutal, dead market, and end up having a losing day, when he shouldn't even be trying to make anything and should just be taking the day off. 

Millenials: Penny Wise Pound Foolish

These millenials are proving to be the worst investors.  Not only did they did stay away from the stock market post 2008, thinking that stocks weren't good investments, they flocked towards bitcoin in 2017 and top ticked it near the end of 2017, and have ridden it all the way back down.  Now they are embracing the stock market in droves. 

After that fiasco, you'd figure they would wise up for at least the next few years and at least try to stay away from bubbles.  But now, they are embracing the stock market not by buying index funds and blue chip stocks, but by speculating in the junkiest beaten up stocks and more recently, insane pump and dumps with various themes, first it was Covid 19 (too many to name), then bankrupt stocks (HTZ, CHK), then assorted small cap trash ranging from kid's entertaintment companies (GNUS), to security and surveillance stocks (DGLY) after the Black Lives Matter riots and protests, and along that same theme, black-owned companies (UONE, CARV).

They are also buying speculative calls in droves, seeing the biggest call volume ever over the past few weeks.  

And the dumbest thing about the millenials is that most of them are probably using the absolute worst broker to do their trades: Robinhood.  Not only are their premarket trading hours too short, but their website and app routinely goes down during the busiest times in the market.  And why are they so popular?  Because of zero commissions, the main reason being is that Robinhood sells their order flow to the likes of Citadel and other HFT firms who gladly take the other side of the trade or just front run them.

And another thing about Robinhood investors:  they don't realize how much short interest they could be credited with if they actually used a broker that rebated them for lending out their shares to other firms.  And since they are often long the most desirable shorts on the Street, Robinhood is pocketing all the enormous short borrow fees they collect by lending out their clients' junk filled portfolio.

For example, one of the recent favorite longs on Robinhood is HTZ.  To borrow HTZ short, you have to pay a short interest rate over 200% annualized.  If the broker was fair, they would be giving back a big portion of that short interest back to the client, but Robinhood collects it all.  There are many brokers that rebate the short interest from lending out shares in their portfolio, but Robinhood and some of the other popular no commission brokers do not. 

Ironically, Robinhood does the exact opposite of what Robin Hood did.  Robinhood is taking money from the poor and giving it to themselves, the rich. 

In the last couple of days, we've got the bulls getting confident again, with Fed saying they will be buying individual corporate bonds, better than expected retail sales, and "good" news on coronavirus therapeutics.  That managed to boost SPX 200 points from the Monday overnight lows to post retail sales euphoria highs.  I reshorted and am back on the bear bus.  Looking for a grind lower this week, and more panicky selling after triple witching Friday and on to next week. 

One thing I've noticed among the spread bettor crowd on IG.com is that they were consistently short the equity indexes for the last couple of months, with anywhere between 60-70% short throughout that period.  Now we are almost 50/50 long and short in the equity index positions among retail bettors.

This matches what I have been observing on financial social media, as investors seem more confident about stocks going higher with a belief that the Fed will lift all boats.  The confidence in the Fed to raise stock prices is as high as I've ever seen it.  And also getting reports here and there that hedge funds are getting more and more net long.  Perfect storm is brewing for the August and September. 

Virus Fear is Back

With all the protests in the U.S., it put the coronavirus news into the back pages, but the coronavirus never went away.  It was just a period of coronavirus news fatigue, after months of nonstop Covid-19 coverage.  The protests are the distraction, the virus is what really mattered.

When you have such excessive speculation and froth that you saw in the past 3 weeks, payback is hell, especially when fundamentals are this weak. 

The thing about the short side is that there are more up days than down days, so you are often fighting the grind higher.  So to beat those odds on the short side, you absolutely have to ride it down for big gains on the downside, to make it a long term profitable strategy.  Taking one or two days of gains and breathing a sigh of relief after being down is the easy thing to do.  But with short selling, your wins need to be bigger than your losses, to make up for the times when you have to take small losses on grind higher moves.  You have to take your pound of flesh, a big T-bone steak, when the bulls are vulnerable, like now, and not be satisfied with a quarter pounder with cheese. 

The Fed will not come to the rescue at these levels.  They are already using so much stimulus, if they start doing more here, they will have to do a monstrous amount when we go even lower.   And I don't think even Powell is that much of a chicken little, although he is up there in the top 2 with Bernanke in the Chicken Hall of Fame.  

Sometimes people forget why the VIX is so high and just pile into stocks like they are a one way bet.  Investors' memories are short, and what happened in 2000-2002 and 2008-2009 are all but forgotten.  Or even what happened in March.  When investors start throwing caution to the wind during such fundamentally weak periods, they are setting themselves up for buying near tops of bear market rallies.  What we just witnessed was a monster bear market rally which convinced a lot of investors that a new bull market had started.  That's how the market tricks the majority into doing the wrong thing at the wrong time. 

These are risky markets with lots of uncertainty over the next few months.  Of course, coronavirus is the biggest uncertainty, but also the election in November and what policies Biden will enact when he gets into office.  I know its presumptuous to say that Biden will win but barring some Biden health issue from now till November, a win is pretty much automatic.  The polls show a giant lead for Biden nationwide, something Hilary never had, and in many of the battleground states, he has leads over Trump.  Even in Republican strongholds like Texas and Georgia, he is nearly even with Trump in the polls.

It even seems like the Democrats will take the Senate, and hold the House, which would make passing tax and spend legislation that much easier.  That is not a stock market positive.  

If there is one consensus among Wall Street, it is that Trump is good for the stock market and Biden less good.  I tend to agree, because Biden won't be pandering to stock investors and corporations by trying to do more tax cuts, which go straight to the bottom line for corporations and the wealthy. And Biden has already stated he plans on raising corporate tax rates to 28%, and closing tax loopholes, which would be an immediate 10% hit to post tax earnings for the SPX.

So there are lots of hurdles for bulls over the rest of the year.  The last 3 days is just a preview of bigger things to come.

I have covered shorts into this big gap down, as the market has reached my short term SPX 2950 target.  I plan on putting the shorts back on any bounce towards the 3040-3080 range.  In the short term, the selling has gotten extreme and fear is back, but with Friday opex and VIX opex on Wednesday, I don't think the market makers will let the market go into free fall here.  Could be wrong, but its rare to see big down moves during triple witching week.  There are still a lot of puts outstanding and market makers probably want to pin the SPX between 3000-3050.

I expect any bounce to be short lived and after triple witching Friday, there should be another leg down, perhaps to the 2800-2840 level.  

Massive Top Forming

The speculators keep buying calls.  Even on down days.  It is uncommon to see such low put/call ratios.  It is even more rare to see such low put/call ratios on down days.  The speculation on further upside continues even when markets are going down.  Not only are the put/call ratios extremely low, they are also accompanied by massive options volume, which you usually only see during sharp drops in the market. 

The last time when you saw such consistently low put/call ratios was in 2000. Chart of Nasdaq in 2000.  Analog would fit with the post bubble stage right now.

My SPX projection for the coming months.  Consolidation period could be shorter than my projection, and waterfall decline could start in July.  But with phase 4 coronavirus stimulus bill under negotiation in July, and likely get to passed by late July.  This probably keeps bulls' hopes up and delay the waterfall. 

Jay Powell tried to pump up the markets even more yesterday, talking dovish, saying that he's not even thinking about thinking about raising rates.  The guy has turned into a market cheerleader, and will remain dovish till he gets replaced, with another dove.  Expectations are through the roof for Fed backstops of the market, thus the selloff on the news despite his dovish tone.  And today, with the Fed out of the way, you see what happens to the market.  Straight down in overnight session.

The bulls were counting on Powell to boost the markets even more, and he tried, and it still didn't happen.  We rallied hard into the April 29 FOMC meeting and sold off hard for the next 2 days, dropping 150 SPX points.  We rallied hard into the June 10 FOMC meeting and we are selling off hard.  Another 150 point SPX drop would take SPX to 3080. 

The Fed meme is hardwired into the brains of the bulls.  They refuse to sell ahead of FOMC meetings, expecting more goodies from Powell.  And for the 2nd time in a row, we are selling the news of Powell's dovish talk. 

The Fed is irrelevant now until they start buying stocks.  I believe before they go to negative rates, they will buy stocks.  Here is the progression for the Fed as it ramps up more and more monetary stimulus: 

1. Cut to zero.
2. QE (buy UST and MBS).
3. Buy corporate and muni bonds, including junk. 
4. Yield curve control to keep rates low w/o need for brute force bond buying (coming soon). 
5. Buy equity ETFs. 
6. Increase size of purchases of everything. 
7. Negative interest rates.

The knuckleheads know only one thing, and that is to print their way out of problems, and they have no nuance.  They are trying to prevent inevitable bankruptcies of nonviable businesses and are only creating zombies. Japan is the trailblazer when it comes to central bank policies.  The Fed is following the BOJ playbook to a T.  And they will get worse results, because at least Japan has a current account surplus and don't rely on foreign investors to buy up their sovereign debt.

All the money printing will just speed up the dollar losing reserve currency status, and just watch, as investors will flock towards assets to hedge against the coming inflation.  After the waterfall decline, commodities and gold should do really well.  Real estate prices will go higher.  The death of commercial real estate is overexaggerated.  There are many things that favor shopping at physical stores rather than online:  food, clothing, furniture, bed, home appliances, etc.  And physical stores can also serve as a form of advertising for online sales. 

The MMT policies which have started under Trump will only get bolder, as Pelosi and the Democrats are hell bent on spending even more than Trump and they won't be able to raise enough taxes to pay for it.  The US, like Japan, will not be able to raise taxes without causing a recession.  Which means they won't raise taxes.  They will test the limits of the dollar's credibility.  This will force other central banks to either go to even more extreme negative rates or blow out their government budgets like the U.S. is doing to keep their currencies from getting too strong.

Sure, all the liquidity that the Fed is pumping out has to go somewhere.  But there is nothing that mandates that the money flow to the stock market.  It could just as well stay in cash or go to the bond market, or even real estate. If Biden wins and raises corporate tax rates and closes tax loopholes, that could be the final trigger for the mass flight from equities into other assets. 

Right now, it looks like all the polls show a resounding Biden victory over Trump in November and a likely sweep of both the House and Senate.  That will give Democrats the green light to pursue universal basic income, massive spending on everything from infrastructure, welfare, and pork projects.  Deficits could stay around $3-5 trillion annually for a few years.  Those looking at the 2008-2016 playbook are forgetting that Obama froze government spending with sequestration, raised taxes, and drastically reduced the budget deficit from its 2009 peak levels.  That's not happening again because no one cares about deficits anymore.  The lobbyists who call the shots could care less if the national debt went to $100 trillion, they are there to extract as much money from government as possible. 

We are getting a post-Fed gap down, on no news.  At these high levels, where the air is thin, prices drop for no reason but because once the momentum buyers disappear, the value buyers have no interest in buying here.  As we've seen countless times after the March bottom, these are savage markets.  Even a 48 hour selloff can chop off an arm and a leg.  Think home run, not single.  Staying short.

Run Quickly or Not at All

  "Run Quickly," or not at all; that is to say, act promptly at the first approach of danger, but failing to do this until others see the danger, hold on." - "Speculation as a Fine Art", Dickson Watts


These are exciting times for stock traders, with bankrupt stocks going up hundreds of percent, dogs and donkeys with fleas suddenly turning into thoroughbreds.  If I wasn't already short, I would be having a field day in this market.  But we can't give up on the shorts.  The moment of maximum pain for short sellers is the moment of greatest opportunity.  We've already come too far, there is no turning back.

We are finally seeing that intraday volatility at the top with huge volume that often signify a change in trend.  In an uncommon occurrence, you saw the VIX rally with stocks on Monday.

The VIX is having a hard time getting below 25.  Let that sink in.  25.  Back in the low volatility days from 2013 to 2017, a VIX move up to 25 was considered a big VIX spike.  Now a VIX at 25 is the resting pulse rate for this market.   And when the market starts moving, that pulse rate will easily get into the 30 and 40s.  

In the high VIX environment of the late 1990s and early 2000s,  the VIX during market calm was between 18-20.  So that tells you something about this market.

A symptom of excess speculation and overvaluation is a high VIX.  The shorts are running scared and are unwilling to provide upside resistance to halt the advance.  Portfolio managers have underperformed badly and need to catch up by buying junky small caps, leading to a sharp drop in the Nasdaq 100 to Russell 2000 ratio over the past few weeks.  

 With the Russell 2000 surging, small speculation has hit a level of mania that I haven't seen since 2000.  This tops Jan. 2018, Jan. 2020.

"Public opinion is not to be ignored. The rule is, to act  cautiously with public opinion; against it, boldly. To go with the market, even when the basis is a good one, is dangerous. It may at any time turn and rend you." 

" The foolishness of the many is the opportunity of the few."
 - Dickson Watts

 Public opinion has bought into the statements:  "Don't fight the Fed" and "The Fed has your back".  It is dangerous to go with the market when that belief is so pervasive.  There are modicums of truth to all these financial cliches, but they are usually a shortcut for doing deep dive analysis of stocks and the market itself.

The past 2 overnight sessions have seen sharp swoons during European market hours.  The market looks saturated with bulls, any minor catalyst or even just a change in momentum could make the herd stampede for the exits.  Be careful with longs here.  Very careful.  It is a time to be bold with shorts going against public opinion and the Robinhood traders.  It is a time for a reverse Robin Hood. 

In Fed We Trust

Throughout the madness this week, it makes you wonder what is driving the sudden burst of speculation the last couple of weeks? 

Its not what I think that matters, its what the majority thinks that matters.  And it matters until there aren't anymore people willing to come to the majority view, and then pendulum swings back the other way.

And the majority right now are expressing their optimistic view loud and clear in the options market. It is so extreme that I find it hard to imagine even more extreme bullishness with the economy so horrible.

Take a look at the call volume this week, and I want you to compare to other periods of high call volume. 

 June 1 - 5, 2020

 January 8 - 17, 2020

January 12 - 26, 2018

January 12-26, 2018 period was the 2 weeks right before the SPX fell off a cliff, going from 2872 to 2530 in less than 2 weeks.  January 8-17, 2020 period was followed by a grind higher and then the SPX fell off a cliff, going from 3390 to 2174 over 5 weeks. 

And this time, the call volume is considerably higher(look at the June 3 - June 5 volume) and the put/call ratios are lower.  This is historic levels of call activity, rampant speculation that surpasses anything since 2000. 

The current zeitgeist of investors is the stock market has to go up because the Fed is printing so much money, and if there is a correction, the Fed will just print even more money to rescue the market.  Not only do a lot of investors believe that there is a Fed put, they also believe there is a Fed call, where they are actively trying to push the stock market higher, even after a huge rally. 

Here are the facts:  The Fed is not buying stocks, they are buying bonds.  And while there is a certain benefit that lower corporate spreads and overall bond yields have for corporations, it doesn't eliminate solvency risk.  Yields are already so low that incrementally lower yields has only marginal benefits for the borrowers.  And these low yield spreads guarantee losses in a deep recession like we are having now.

All the Fed liquidity allows is for companies to issue even more bonds, but the money borrowed has to be repaid, plus interest.  So ultimately, businesses have to generate enough cash flow to cover interest and repay principal, or get even more into debt.  The corporate sector is already highly leveraged from a historical perspective. 

Highly levered companies are more vulnerable to a recession, and if the recession is long and severe enough, it will force them to raise capital with either more debt or equity.  That's why you saw a mountain of debt and equity issuance over the last 2 months.  Most of these companies are choosing to issue debt rather than equity, and the reason is obvious.  The company insiders don't want to dilute and hurt the stock price, which a lot of their compensation is based off of.  It just makes these companies more fragile as more debt is piled onto the balance sheet.  Eventually, the debt market will shut them off and force them to either dilute massively and/or provide super high yields to buy their debt.  It is a debt house of cards.

The change in investors' attitude towards risk over the past 10 years is astounding.  Who would have thought that investors would now chase bankrupt companies like HTZ and frauds like LK and ramp them up hundreds of percent in days?  These kind of speculative manias always end badly. 

The timing has been difficult, as this steep rally has gone beyond a lot of people's imaginations.  It is one thing to go up 9% in days right after a panic bottom, that's rather common.  What's unusual is going up 9% in 9 days right after a 2 month period of going up 40%. 

The corporate insiders have been dumping a lot of stock into the rally.

All the signs are there that an important top is being formed now, something that will lead to a huge selloff.  We are well past the point of playing for small moves.  If you have been short and in pain, covering early on the next downleg is a mistake.  These type of parabolic rises/blowoff tops have sharp selloffs:  see January 2018, February 2020 for 2 recent examples.  And if you want to go back to the old days, numerous blowoff tops in 2000, bear market rally blowoff tops in 2001 and 2002.

Its no longer a time to play for singles and doubles.  We are now looking for home runs.  When you get a fat pitch like this, you swing for the fences.  

Echo Bubble

The pain is real now.  The bulls are going for blood.  The moves are getting insane, not just in the stock indices, but especially in individual stocks, the crappiest of the bunch, bankruptcies like HTZ, frauds like LK, and scammy pump and dumps like GNUS.  The speculation is about as intense as I've seen since 2000.  It must be all the newly minted daytraders who are unemployed and receiving all those unemployment checks.

Since a lot of casinos are closed, the stock market has served as the biggest online casino ever created.  And this casino actually has decent odds, compared to the real brick and mortar one.

The Fed has created another monster, and all it knows to do is just print and print some more.  Powell is a coward, just like Bernanke.  The whole institution of the Fed has abused their power to enrich their buddies and to keep pumping to keep the Ponzi scheme going.  It is short term thinking that has pervaded all parts of the government, the White House, Congress, and the Fed.  They see markets go up when they spend trillions of dollars and spew money everywhere, with very little inflation to show for it, and think that they're doing God's work.

The U.S. is on its way to becoming a giant banana republic.  They massively outspent every other country during this coronavirus event as a percentage of GDP, and its not even close.  A fair amount of this money is flowing into the stock market.

The speculation has been rampant, just like you saw earlier this year in stocks like TSLA and SPCE. Here is a chart of TSLA compared with the SPX.  Obviously, TSLA's moves are huge compared to the SPX, but when TSLA went parabolic and topped out, the SPX soon followed to the downside.

The bullish enthusiasm is spreading to not only junky speculative names in the US, but also leading to some steep up moves in the beaten up European banks.  The speculators are reaching out to the riskiest parts of the market to get more beta and hoping for greater fools to buy their shares higher.

The volume in Nasdaq stocks was through the roof yesterday, according to Stockcharts.com data.  As you can see, usually the volume spikes are on down days, as volume was heavy in March.  Volume spikes on flat to up days is unusual, and speaks to the amount of speculation going on, not liquidation, like it is on down days.

Along with the stocks surge this week, you had bonds get crushed.  As I've mentioned before a few times, a weakening bond market is one of the first signs of a stock rally about to end.  Along with the low put call ratios and rampant speculation, you are seeing an overall picture of a market that is in a topping phase.  This week had all the hallmarks of a blowoff top.  We just need to see the selling on the other side to confirm.  It always looks scariest to short at the top.

Riots Don't Matter But...

Riots and protests don't have any kind of lasting effect on the market, most will agree.  But then why do people get so bearish when they see the news coverage of the riots?  Its because people are emotional, and expect the market to follow that emotion.  The market is swayed by buy and sell orders, and in this day and age, most of that is HFTs hunting for paper flow to front run. 


If the market goes down this week, which I expect, will it be because of the riots?  Or because it reached extreme overbought levels, with over 90% of stocks above their 50 day moving average?  I am sure when it goes down, its going to be people saying civil unrest and riots finally brought a selloff.  But I would argue that its because the market has passed the thrust off the panic bottom phase, and entered a choppy topping phase. 

We are in that bear market topping phase, where the conflict between fundamentals and technicals causes choppy trading and eventually leads to the market rolling over and going back down to where it was at the panic phase. 

I could easily see a move down to SPX 2950 within the next 10 days and still not expect the market to have made the final top of this bear market rally.  I am sure any move below 3000 on the SPX would be accompanied by a lot of bearishness, considering the news flow and focus on the riots and looting. 

But we will soon reach the peak of the riots, and it will be forgotten like so many other irrelevant news stories that scared investors in the past.  The only very minor tangential effect the news flow could have is on the November election, but even then, I don't think it changes the results.  Its too far away from November, and people will have mostly forgotten about these riots by then. 

The economy is the most important factor in voters' decision making, and the coronavirus economy is still going to be weak with lots of unemployment in November.   So that is a huge negative for Trump who is facing an uphill battle to get re-elected under such weak economic conditions. Putting his signature on stimulus checks is not going to change peoples' opinions about him and the weak economy. 

But unlike what most people believe, a Biden win and Democratic sweep of the Congress would not be a bearish outcome for stocks.  Looking at all the spending and stimulus that Pelosi and the mainstream Democrats want to do with Trump in the White House, imagine the amount of spending that they would want to do with Biden in the White House.  And all that things equal, higher government spending not fully offset by tax increases raises GDP, and that is usually bullish for stocks. 

The worst possible scenario would be Biden winning and Congress being controlled by the Republicans, similar to the early Obama years.  That would mean fiscal stimulus would likely be blocked by the Senate/House, and this time, with rates already at zero and the curve near zero out to 10 years, the Fed won't be able to rescue the stock market through the bond market channel, and would have to outright buy stocks if they want to rescue it.  

The volume was extremely low yesterday, surprising considering it was the first trading day of the month, and with the riot news out there.  Its actually not a bullish setup in the short term, as I've seen a few low volume tops after an extended rally off a panic bottom.  Plus the put/call ratios remain low and overall, investors are complacent.  However, hedge funds are still not fully embracing the rally, so its not yet an all clear to go all in short.  We may chop around the SPX 2950-3100 level for a few weeks before it finally cracks much lower.  You rarely get perfect setups on the SPX but odds are in favor of the shorts here.