An Overvalued 2012

 While the narrow tech led rally and tail end of a long bull market remind me of 1999 and 2000, the bond and currency markets acted quite differently back then to now.  In 1999 and 2000, you had a strengthening dollar, especially against the euro, and interest rates were rising, with Fed rate hikes.  

 If you consider the bond and commodity markets, along with stocks, then I see a lot of similarities with 2012, with two big differences:  valuations + long term psychology towards equities.   

In 2012, you still had the 2008 financial crisis in the back of nearly everyone's mind, and the bull market was still only 3 years old.  There was still a deep-seated skepticism towards equities and the trust in long term asset appreciation from stock investing was not there.  

If you throw out the quick crash and V liftoff markets of 2011, 2018, and 2020, which weren't lasting bear markets, but more like 1987 style crashes, then you are looking at a 11+ year bull market right now.  But other than that difference, you see a lot of similarities.  

The setup for the current market is the February-March crash which set up the big fiscal/monetary stimulus that has rocketed the stock market to new all time highs while bond yields remain very low.  The setup for 2012 was the 2011 European sovereign bond market led crash in Aug/Sep 2011 that provided the groundwork for ECB and Fed stimulus.  Gold was also in a strong uptrend by the time the August 2011 crash happened, and it was still trading relatively high in 2012.  And of course, much like now, you had 10 year Treasury yields trading near all time lows, and not going higher even as the stock market kept going up in early 2012.  

The current stage of the rally feels similar to March/April 2012, which saw a breakout above the May 2011 highs at 1370, ultimately topping out at 1422, which was the topping phase after a 6 month rally off the October 2011 bottom.  It is now more than 5 months since the March 23 low, and we got the breakout above the February highs at 3393, and if it plays out similarly to 2012, should be topping out very soon and have a down market for 2 months into a flush out low.  

If you get a similar pullback in SPX as you did in 2012, which was a 10% down move, you are looking at a 350 point downmove, so if the market tops out around SPX 3520, that equates to a correction down to 3170.

Today we have the much awaited splits of AAPL and TSLA.  And the market is gapping up again while the European indices try to follow the move higher only to steadily drip lower from the open.  The US is going up by itself, and the overseas indices have little interest in following it higher. 

Market Regime Change

The VIX is not going down as the market keeps going higher.  In fact, it is going up with the market.  And the VIX is already high at 24.  There are more and more unusual extreme conditions that keep popping up.  The parallels to the dotcom bubble period from 1998 to 2000 keep popping up.  They are the following:

1. VIX staying stubbornly high, above 20, and even going higher as the stock market keeps going higher.  This didn't happen at any time over the past 20 years.  Even in the post crash 2009 rally market, the VIX made lower highs and lower lows as the SPX kept going higher.  The last time we saw the VIX stay so high as the market kept rallying was 2000.  It appears that we've entered a new volatility regime, much like the jump step higher in VIX(12 to 20) from 1996 to 1997, with VIX staying high as the market went higher in 1999 and 2000 (staying mostly above 20).   

2. Equity put/call ratios moving to very low levels and staying there for months.  In June, we saw tremendous call volume and very low put/call ratios.  Since then, the put/call ratio range has shifted to a lower level, to levels that we haven't seen since 2000.  

3. Growing divergence between large cap and small cap performance, especially in Nasdaq names.  Not all Nasdaq stocks are performing well.  Its really only the big names like MSFT, AAPL, AMZN, FB, GOOG, TSLA, etc.  Those doing the worst are companies with market caps under $1 billion, and especially those under $500 million.  Again, a continuation of the large cap vs small cap divergence that we've seen since February 2019.  That persists 18 months later, and is getting even bigger.  Similar thing happened in 1998 and 1999 between SPX and Russell 2000 shown below.

Ironically, the market topped out in March 2000 as the Russell 2000 started to catch up with the SPX.  This was also a time when 10 year yields were in the final phase of the uptrend it started from in late 1999.  

Current divergence between SPX and Russell 2000:

Back to the current market.  It is index short seller hell.  The uptrend has gone parabolic led by just a few tech stocks.  The fall can't come fast enough.  Perhaps the top will be when AAPL and TSLA split their stock on Monday, August 31.  We saw a big move higher in bond yields yesterday, which is a positive for bears, as the market likes to top out after bond yields have gone higher (see October 2018, April 2019, June 2020). 

Inflation in the Coming Years?

 Almost every time you get a big round of QE and/or fiscal stimulus, the inflation bugs come out and talk about how inflation is just around the corner.  You saw that from 2009 to 2011, and again in 2018.  

The problem with saying whether there is inflation or not is because of how poorly its measured by the government.  The government distorts prices and uses every methodology in the book to make inflation numbers smaller in the CPI.  Hedonic pricing, substitution, etc.  If you are going to measure inflation based on how the government does it, then its going to take a huge inflationary wave to come up in the numbers.  

I see two main forces for inflation in the coming years: 1. Dollar weakness. 2. Low wage growth.  

 I expect the dollar to be weaker vs other currencies as well as vs gold/commodities.  This will result in cost-push inflation.  A commodity bull market is inevitable when you see how little oil producers have invested in future production, and the huge increase in the money supply this year and probably continuing to a lesser degree with bigger budget deficits financed by QE means more money chasing the same amount of commodities, which will make prices go higher.  

The countervailing force is low wage growth.  If the masses don't have a lot of money to spend, then consumption will be subdued unless you have something like universal basic income.  And as much as modern day Democrats like to spend money, I don't see enough support for universal basic income just yet.  There will have to be prolonged economic weakness that lasts years before you see that happen.  

The last time you saw high inflation (as measured by the CPI) was from the late 1960s to the mid 1980s.  That also happened to be a period when wage growth was over 10% during economic expansions.  Since then, it has gone from 10% to around 5%.  

Unlike a lot of macro "experts", I don't believe that US exports will go down much or that manufacturing will be making a comeback in the US.  The wage gap is just too great between the US and emerging market countries and companies will always use low cost labor whenever possible.   I don't expect big changes in US trade policy with either Democrats or Republicans.  The political powers main focus is the S&P 500, not being tough on China.  And no, Trump is not tough on China.  He raised tariffs a small amount and then stopped.  Its all talk, little action.  And Biden is basically bought and paid for by China so no changes will happen either under him.  

And if not China, companies will just manufacture in Vietnam, India, Mexico, or some other low wage country.  

Also, with so many mergers and acquisitions that happened over the past 40 years, competition has been drastically reduced, which gives companies a lot more bargaining power with workers.  When there are only 2 or 3 companies in a certain field, that means workers have limited choices for work, which means they can't request higher wages because there aren't many companies bidding for their services.  

So where does all that extra money supply end up?  In the financial markets.  The cream rises to the top.  In a crony capitalist society with too big to fail backstops, the big get bigger, and the small stay small, or go bankrupt.  The US business world has basically become a group of oligopolies and quasi monopolies that use their political power to keep competitors from catching up or even coming into existence.  Pricing power comes from having few to no competitors.  And profits come from pricing power.  Those profits are coming from both their workers and their customers.  

I don't expect any anti-trust legislation from Biden.  He will probably do what Obama did which was basically nothing but more regulation which helps big corporations keep competitors away. 

In the markets, inflation only matters in how the Fed reacts to it.  If they act and pretend like inflation is low and under control when it is high, then bond yields will stay low because the Fed will keep buying bonds.  And it seems like Powell at least will not raise rates or quit QE unless you see runaway inflation, which isn't likely under the current US economic system that favors capital over labor.  

So we could have inflation, skyrocketing commodity prices and still have low bond yields.  The US dollar will be taking the heat from the big budget deficits monetized by the Fed.  The Fed has no intention of letting rates rise much, because as soon as they do, the super leveraged financial markets will have a tantrum and then the Fed will be back to either do more QE or even start buying stocks in order to placate the markets like they always do. 

The grind higher continues, at this point its just wait, hold the shorts, and hang on for the ride. 

Pre-election Pullback

The big move higher in the Nasdaq last week was basically the big 5 plus TSLA.  Most of the other stocks in the broader market have shown no interest in following the leaders higher.  In fact, most have been going lower.  I can see it on my watch list of speculative small cap names, most are going down every day, and not by small amounts.  Big chunks have been given up by the Covid pump and dumps and other assorted daytrader plays from the past 2 months.  

This is nothing like the move higher in the indices in June, when you had very broad participation in the speculative wave, and almost everything was going higher.  I suspect that a lot of this is due to both fundamentals not supportive of further moves higher and the lack of a fiscal stimulus deal which is cutting off a lot of the liquidity towards small cap speculation.  

The stock market is now not only a QE addict, but its become a fiscal stimulus addict.  And this isn't something that just started in 2020, it started with the Trump tax cuts in 2018 at the peak of the business cycle.  Like any drug addiction, its much easier to start than to quit.  And since most of the public doesn't care about budget deficits or the national debt, politicians will deliver what the public wants.  Mo money, mo money, mo money.

Bearish for the next 2 months, but things will probably change after the November election.  In general, the market has a tendency to have a pullback ahead of a presidential election (2008, 2012, and 2016).  

 September - November 2016

 September - November 2012

September-November 2008

 Considering the amount of uncertainty coming into the election, with both virus second wave concerns and the election, I expect this pattern to repeat in 2020.  Should see a weak September/October period this year.  

As for the post-election outcomes, I really only see 3 possible scenarios.

A Democratic sweep of Congress and the White House which is the most likely scenario based on polls and betting markets.  This will lead to a big fiscal stimulus package early next year.  Tax increases would probably be delayed till 2022-2023 due to the current economic conditions and political indifference to huge deficits.  It is probably the best case scenario for the stock market.  

The next likeliest scenario is a Democrat win for the White House and House of Representatives, and a Senate win for the Republicans.  That would make a big fiscal stimulus package very hard to pass as most Republicans will have no incentive to fund a bunch of social programs and infrastructure to help out a Democrat president.  Little fiscal stimulus is a disaster for a market that can only run higher on more and more government spending and/or tax cuts.  This is the worst case scenario for the stock market. 

The third most likely scenario is a Republican win for the White House and Senate, with Democrats maintaining control of the House of Representatives.  This would be similar to the Democratic sweep of Congress, but the fiscal stimulus package probably won't be as big under Trump as it would be under Biden.  But you will still likely get a lot of infrastructure spending and as a bonus, there would be no tax increases.  This is also a good scenario for the stock market.  

So overall, you have 2 of the 3 most likely outcomes as a positive for the stock market after the election.  So the short Nasdaq/SPX trade is aimed at capturing the September/October pullback ahead of elections.  After the elections, most likely the market will rally higher.  

There are concerns about a disputed election and complaints of fraud are likely if Trump loses, and like most things that are sensationalist headlines, it probably has no lasting market impact.  

Its time to throw caution to the wind.  It is a time to get bold on the short side, with puts now being undervalued IMO. AAPL and TSLA split their stock on August 31.  So I expect a big hangover after that date, as many speculators delay sales until they get their "extra" stock.  This lines up well with my September/October timeline for a substantial pullback.  I will be adding to shorts in the coming days up to the August 31 split "party". 

Slow Summer Trading

 The volatility has succumbed to the summer doldrums.  The volume has dropped off precipitously since end of July, and when traders don't trade, you get less volatility, and lower volatility induces vol-targeting funds to increase equity exposure, because you know, they like to buy when volatility is low, and sell when volatility is high.  In other words, they like to buy high, and sell low.  

The tremendous momentum has finally run over all the bears, and the fear has all but dissipated, which is why you are not seeing those weekly vicious dips like you did even during the steep uptrend from April to July.  Everyone has looked foolish for selling on those dips, so they have gotten smaller and smaller, to the point where last week, the biggest scare you had was on Tuesday, when the SPX went down 50 points in the afternoon.  That was child's play a couple of months ago, now it scares out the fund managers because they are getting used to lower volatility.  

Based on risk/reward, short is the right side, but I will have to admit that we're probably going to have one more last gasp rally this month, to break all time highs, get bulls excited, and bears nervous, before the September rug pull.  

The sentiment is slowly getting more cautious, which is not necessarily a bullish sign for the market.  Bullish sentiment usually tops out before the stock index, and that's what it looks like is happening here.  I have a hard time imagining bulls getting excited to add more exposure at all time highs with the coming uncertainties this fall.  Market hates uncertainty, and its still far enough out there for them to ignore it for now, but by September, it won't be.  

It seems like Trump has concluded that he has a better chance to win the elections with much reduced mail in voting than with a stronger economy fueled by free money from another big fiscal stimulus deal.   He's probably right.  Democrats are much more likely than Republicans to mail in their ballots, since most Republicans are less fearful of catching Covid and more likely to vote in person.   Democrats are reluctant to give Trump the big fiscal stimulus deal without increased funding for the US Postal Service and to the states for mail in voting, and Trump probably is just waiting them out, expecting them to cave in and give him what he wants, free money for the people to goose the economy without any money for the Postal Service to suppress mail in voting.  And if Dems don't cave in, the Postal Service won't be able to handle all the mail in ballot volume coming in, favoring Trump big time.  

Whatever results we get out of the election, expect there to howls of fraud either way, and its probably going to be an ugly scene.  Market is not even thinking about that right now, with many just chilling out and doing nothing during the summer lull, but when they get back to work in September, the theme will be to reduce risk exposure, and that should pressure stocks lower.  

This low volatility lull won't last for long, probably 1 or 2 weeks more, and then its back to fear and loathing mode. 

1999-2000 Parallels

 Seeing more and more signs that we are repeating a 1999/2000 bubble blowoff top.  It doesn't affect my intermediate term outlook for the next 2 months, but it does affect my longer term outlook following the November election for the next 12 months. 

Market Internals/Divergences

First the obvious sign that this similar to 1999/2000:  Nasdaq outperforming the S&P 500, and the S&P 500 outperforming the Russell 2000.  You see the divergence getting bigger since the March lows.  A small number of stocks are leading the market higher and higher, while the rest of the market struggles to follow along. 

Nasdaq/SPX January 2019 to August 2020

Nasdaq/SPX January 1998 to May 2000

SPX/Russell 2000 January 2019 to August 2020

SPX/Russell 2000 January 1998 to May 2000

Increasing Volume

There has been a big increase in volume since March.  Nasdaq total volume has shattered all time record highs and printed above 6 billion shares daily during the peak in June this year.  Similar big increases in Nasdaq volume occurred in late 1999 to 2000.  Volume is a function of volatility and speculative interest.  There has been a big jump in speculative interest just by looking at Robinhood account activity and the number of new brokerage accounts opened since March among all online brokers.

Put/Call Ratio

The persistence of low put/call ratios since June is getting hard to ignore.  Here are a few things that point to a potential phase shift for options markets from the 2001-2019 regime to the new 2020 regime.  When an extreme level doesn't provide the same signals as it did in the past, and continue to persist, you have to consider a possible change in market regime.  If these low put/call ratios continue through the rest of the year, you have to adjust the definition of extreme put/call ratios to lower levels. 

 

 h/t @ResearchQF

One of the possible reasons for this change could be the prevalence of daytraders who speculate on the market not through stocks but through options.  And retail traders now seem to be more heavily involved with calls than puts, especially since the March lows.  Another reason could be the reduced level of put selling following a catastrophic result in March from selling out of the money puts for income. 

SPX is having a hard time cracking through to all time highs.  It is to be expected that there will be stiff resistance here after the amount of rallying this market has done over the past 5 months.  It will be choppy for the next week or two and then I expect a sharp pullback in September. 

Nasdaq Lagging

 The momentum trade in the Nasdaq big cap names is starting to unravel.  Nothing huge yet, but the Nasdaq Composite continues to trade heavy compared to the SPX and especially compared to the Russell 2000.  The Russell 2000 is really a side show, its importance is overstated.  Breadth is useful in some cases, but only at truly extreme levels, either good or bad.  The SPX has been able to do fine with weak breadth all year, so its not something that really drives any trading decisions.  

What matters are the big boys, the big 5.  MSFT, AAPL, AMZN, GOOG, FB.  They are the key to the long term direction of the SPX.  Those are the most popular stocks among both hedge funds and retail, so they are a pure read on the sentiment of the market. 

 The weakness over the last 3 days sticks out because if you remember, AMZN, AAPL, and FB had "blockbuster" earnings in late July, all on the same day, and investors were extremely excited about those stocks.  Yesterday, we revisited those post-earnings levels in the NDX, even as the SPX was near all time highs.  

The big cap tech names trade like they are overowned, and totally saturated with buyers.  Those who want to get into those stocks have already gotten in, or won't get in unless they trade much lower.  There definitely doesn't seem like there are too many eager Nasdaq buyers on just a 2-3% correction.  

Since the uptrend has lasted for so long, almost 5 months, there definitely will be some buyers on dips, but eventually, when all those dip buyers have gotten their full allocation of big cap tech, especially, then we can go down in earnest and test some of the important levels below, SPX 3200, 3130, and 3000.  

Another bearish thing that happened over the past 3 days is both gold and bonds finally having steep selloffs, something that was a warning sign in early June, which led to a sharp pullback.  And whenever popular trades like gold and silver suddenly go parabolic and then selloff sharply, its a sign of rampant speculation driving prices too high compared to the fundamentals.  That kind of mindset flows over to the stock market.  

It is without a doubt bubble behavior using the rationale that the Fed is pumping tons of liquidity into the market and lifting all boats.  That belief is so hard wired into investors' heads that its become a self fulfilling prophecy.  The herd can drive a trend to extremes until the forces of supply and demand correct that trend.  This year, you are seeing stock buybacks drastically cut and equity issuance increase at the same time.  If prices stay high while earnings don't grow, corporations will likely try to take advantage by issuing more stock.  

Bottom line, the leaders that have driven the market higher since the March bottom are starting to show signs of buyer saturation, and you are seeing rampant speculative blowoff tops in gold and silver.  Piece by piece, you are getting closer to that exquisite moment where the market tops out and the trend changes violently.  We are almost there, but the bulls won't rollover easily.  They will fight it until the selling forces overwhelm them.  It may take up to 2 weeks before we get that change of trend, but the time bomb is ticking and it can go off any day now. 

Calm Before the Storm

 The volatility is the lowest since March, as the up trend continues and bears throw in the towel.  Fund managers are feeling the heat from being underinvested and have gradually increased their equity exposure.  

 From themarketear: 

 

Aside from a few week in June, equity positioning has been above average.  Also, data that I've seen from Hedge Fund Research has shown hedge fund returns increasingly correlated with SPX since June, meaning their equity exposure is increasing.  

On Friday, we saw signs of upside exhaustion in the Nasdaq composite as it went -0.87% while the SPX was +0.06%.  Russell 2000 was +1.59%.  Much like early June, the Russell 2000 is outperforming the Nasdaq after an extended rally.  Don't want to extrapolate from a sample of 1, but there was a violent pullback just a few days later.  

Rampant speculation in gold and silver are another sign of speculative fever, which are common near market tops.  See what happened in May 2011 with silver and the concurrent SPX price action. 

Another sign of the excessive speculation is the put/call ratios on a weekly basis, which is the now lowest since 2000.  Lower than February 2020, lower than January 2018, and only comparable period is the dotcom bubble era.  The call volume is overwhelming the market in MSFT, AAPL, AMZN, and FB, and much of that volume is retail.  Retail traders have fully embraced the tech is special zeitgeist and have piled into the most overvalued stocks in the market.  Now GLD and SLV have joined the call party in recent weeks and volumes are exploding there. 

Unfortunately, going forward, Robinhood is no longer releasing account holdings data to the public so we won't be able to get an exact read on retail speculation, but just by looking at the call volumes, you can get a close approximation of what they are doing. 

All this is happening before school reopenings which are huge potential breeding grounds for virus spread and of course the election, which will determing whether corporate tax rates will be going up or not, and determine whether Democrats will be able to win both houses of Congress and the White House to enact massive government spending.  

Probably the worst case scenario for the market would be a Biden White House with a Republican Senate, which would block or water down any fiscal stimulus measures.  And that is probably a close second to a Democratic sweep in the probability of it happening in November.  

The stock market has gone from monetary stimulus to fiscal stimulus as the mother's milk that feeds it, so the election is the most important variable in the coming months.  A close Biden victory over Trump would be the worst outcome for the stock market, because that probably means that the Republicans hold the Senate and can block any big fiscal stimulus bills.  Weak fiscal spending is now the kryptonite for the stock market.  

There is no organic growth anymore in the U.S., and basically the whole world, with all this debt, only a massive amount of additional debt can keep this zombie marching forward.  Without big deficit spending in Washington, there won't be a rising stock market.  The Fed's last remaining card, outright stock purchases would only encourage corporations to issue as much overvalued stock as possible to feed to the Fed, because the earnings won't be there to support the valuations.  

With so much uncertainty coming up in a seasonally weak time period for the stock market, after a nearly 5 month rally in stocks that have added over 50% to the SPX, near all time highs, I can't think of a much better risk/reward scenario for shorting the indices.  Maybe I am just old fashioned, thinking historical tendencies will repeat, and its not a new era.  We'll find out soon in the next 2 months. 

A Coiled Spring

We are pricing in the fiscal stimulus deal getting done + more.  If you read the headlines, it may still seem like the Democrats and Republicans are still far away from a deal but unless a deal is coming, rarely will both sides mention that talks were productive and things are improving in negotiations.  Anyway, market is taking that "uncertainty" off the table and concurrently pricing stocks higher.  This may be the feel good news top after a huge rally.  

Although I am not responsible for your trades nor do I tell people what to buy or sell, I do feel a sense of responsibility for what I write.  I will admit that I have been early in shorting the rally since the March bottom, with early shorts in May.  I did take a lot of heat on those shorts and looking back, my calls were completely wrong.  I was way too early, but I mitigated the damage by bailing out on the dips in mid June and late June, which saved my bacon.  I even managed a small profit after the dust settled.  Same goes for the NDX short in mid July where I also took some heat but which turned into my favor and I was able to cover some for a decent profit.  But this time I have a different view and more conviction. 

On a scale of 1 to 10, my conviction shorting SPX in May and NDX in July was about a 7, so there were small doubts in the back of my mind mainly due to the proximity to the March bottom and the remaining fear that was lingering among investors.  I probably should have taken a smaller position back then, especially in May, but sometimes I just get a bit too aggressive even without the highest of convictions. 

Shorting now is very different.  First of all, over 2 months has elapsed since my short campaign which started in May.  This time, instead of shorting SPX, I am shorting the NDX.  The reason for shorting Nasdaq instead of S&P is simple.  All the speculation is occurring in the Nasdaq and it is also the most overbought and most loved. 

My conviction on my Nasdaq short is about a 9 now.  I have gone over most of the reasons in previous posts, but its a function of time since the last big correction (March) and price, i.e. the extent of the rally (huge) since with just very short term dips along the way.  I have built up my short position since Monday and am almost at a full position now. 

With time elapsing, now over 4 months since the March bottom, more and more complacency builds up, providing the potential energy for a waterfall decline.  Like a coiled spring getting pushed tighter and tighter until the slightest movement sets off a huge move.  I've shown previous examples in last month's blog post. 

Markets have evolved over the past 20 years.  After 2008, for the first few years, market tops were formed when the indices chopped back and forth for a couple of weeks after a long rally, and then made a sharp decline.  Examples include April 2010 top, May 2011 top, April 2012 top, and September 2014.  But since 2018, the tops have come suddenly, with very little volatility or choppy back and forth daily price action to signal an imminent change of trend.  January 2018 and February 2020 tops are the best examples of this.  The market was still trending up before the bottom fell out.  The September 2018 top was also very quiet, with very little choppy price action before the big drop.  Same goes for April 2019 and July 2019. 

So what used to be signals that the market was about to change trend and a big correction was coming doesn't happen anymore.  The algos and nature of the market is to push as high as possible until there is total buyer saturation, and then on the other side of the mountain, there are no eager buyers left, and hard to put on a short position unless one is comfortable shorting in the hole and expecting a bigger hole. 

It is ironic that positive stimulus deal news was more happily received by gold and silver than by the SPX.  Its gotten to the point where the market now mainly views the stimulus as a dollar debasement exercise, and secondarily as an economic bailout.  
I don't have a strong view on gold and silver, I do believe the dollar is in the middle of a long term downtrend, and strong FX trends tend to ignore overbullish sentiment and just keep trudging along.  And this dollar weakness trend looks quite strong to these eyes.  Its a long time coming, and with the way that the US government and the Fed have reacted to the pandemic, it shows you how they will operate going forward.  Printing and spending money zealously like no other country this side of Zimbabwe.  In comparison, Europe and Asia are taking much more modest measures and doing a much better job of focusing on the pandemic more as a healthcare crisis rather than an economic crisis.  It is all about supply and demand, and even if demand for dollars stay the same, the supply is growing at such a rapid pace compared to other currencies that the forces pushing down on the USD are immense.

Caution to the Wind

Robinhood traders, the butt of traders' jokes, have recently been viewed as astute, and trading better than hedge funds, as they have piled into big cap tech as well as momos like TSLA, and pump and dumps that have been remarkably resilient (NIO, WKHS, etc).

Let's not confuse brains with a bull market.  And let's not extrapolate the short term with the long term.  Investing/trading is a long term game, even if it seems like everyone is just focused on the move over the next hour/day/week. 

 
 Over the past 30 days, retail investors have piled into big cap tech, with the leader being TSLA, the stock hated by most of Wall Street but loved by most of Main Street.  And then you have the stocks loved by both Wall Street and Main Street:  AAPL, MSFT, AMZN, MRNA, PFE, and NFLX.  KODK snuck in there with a giant pump and dump move last week, which attracted daytraders like flies to turds.

Robinhood isn't a small broker that just came to the scene a few months ago, it has been around for a few years now.  Yet, the huge jump in accounts holding tech stocks over the past 30 days gives you a clear view of what retail is thinking, and believing in.  What they believe in is very similar to what Wall St. believes in.  Big cap tech:  AAPL, MSFT, AMZN, NFLX, FB.  And Covid plays:  MRNA, PFE, KODK? ( ;-O ) .

Reflexivity reinforces trends that have a good story with a kernel of fundamental truth:  consumers and businesses going to the internet to do almost everything.  That is the basis for the rush into the big cap tech names as well as SaaS/cloud stocks.

A recent blog post by y0ungmoney  goes into some detail about the big cap tech names.  Especially relevant for AMZN and MSFT, as they are heavily dependent on cloud hosting for their growth, and what they are doing is charging huge subscription fees for something that can be done much more cheaply at larger firms that have the capital to hire IT workers and deploy their own servers.  And GOOG and FB are much more mature companies than investors think, as online advertising is now a very big part of the advertising market, and not exactly capable of replacing TV/radio advertising which seems to be better at building brands. 

And a word about the stock market now expecting a big fiscal/monetary stimulus rescue package anytime you get a slowdown in growth/recession.  This goes along with the death of the business cycle that was paraded around in the late 1990s and late 2010s.

Investors are extrapolating the past 10 years into the next 10 years.  That is dangerous.

1.  The 10 year yield has gone from 4.0% in 2010 to 0.55% now in 2020.  Unless the Fed decides to go to a -4% Fed funds rate, that kind of drop in bond yields is not happening again.  So the room for monetary stimulus to benefit corporations is much less now. 

2.  US budget was in surplus in 2000 at the top of the business cycle.  In 2018, at the top of the business cycle, US budget deficit was over $1 trillion.  There is much less fiscal space to expand government spending without significant tax increases.  And if there is anything we've learned, tax increases are never enough to pay for the spending.  And deficits keep getting larger.  But there are limits to deficit spending when it starts to erode the value of the currency.  We are seeing that now as the dollar is starting to weaken as the fiscal stimulus keeps coming, doing much more than any other country in the world.  

A weaker currency for a big negative trade deficit country like the US is harmful for the overall economy.  The US economy is ~70% consumption, and a weaker dollar increases the price of goods which can't completely be made up for by increased exports.  Eventually, the government will either have to choose between high inflation/low interest rates and low taxes or choose low inflation/higher interest rates and higher taxes.

In the long run, profligate government spending and massive deficits erode the confidence of foreigners to the US dollar, increasing the probability that it loses reserve currency status.  Losing reserve currency status would instantly force the US to lower budget deficits as the demand for dollars would drastically shrink, if they don't, they could face potential Zimbabwe like inflationary pressures. 

3. After tax profit margins were at an all time high in 2019, as quasi-monopolies and oligopolies became more common.  There is only so much blood that capital can squeeze out of the labor rock until there is no more left.  We are at the precipice of that limit with record wealth inequality.   Without fatter profit margins, profit growth will be limited as growth is constrained by demographics and lack of productivity, especially now.  Also corporate tax rates are historically at low levels in the US.  There will be pressure to increase corporate tax rates in the coming years. 

4. Workers realizing that its much easier to make money just sitting at home buying stocks receiving fat unemployment benefits than it is to go out and actually work and do something productive.  And if Democrats win the 2020 election and sweep Congress, like the betting markets are forecasting, then you will get lots of government spending, and eventually universal basic income.

The US has incentivized laziness by giving away more money for those unemployed who are either daytrading at home or watching NFLX and shopping online at AMZN than to those who are working.  And if working at home actually becomes more pervasive in the long run, that will decrease worker productivity, because who works harder from home than from their office?  Almost no one.

5. Valuations are similar to the dotcom bubble peak for the overall market.  But unlike 2000, you don't have the same growth profile and very little room to cut rates.  Overvaluation is a big headwind for future returns that is underestimated by the market and its short term thinking.

Added to shorts yesterday, will add more this week as the risk/reward is very favorable.

Stimulus Deal Backstop

Remember when the market would always rally when there were hints of a US/China trade deal in 2019 and selloff when things were supposedly going bad? Its the donkey with the carrot in front of it.  Donkey will keep moving forward to get that carrot, much like the stock market going higher and higher as the carrot gets closer and closer.

To a lesser extent, that is what is happening with the fiscal stimulus bill.  Sure, you are going to get supposed setbacks, and fake fighting, but in a election year, you really think these politicians aren't going to give away goodies to get votes? 

As I have mentioned previously, you will not get a serious decline before the stimulus deal is passed.  Because it is a "positive catalyst", a lot of longs will not sell until the deal happens, expecting a pop on the news.  So there are fewer marginal sellers, thus any marginal buying leads to much higher prices.  That is what you are seeing with the gap up today.  But there is only so much you can push the market before it gets to nosebleed levels where you have to sell, regardless of the positive catalyst just days away. 

With SPX almost at 3300, and NDX almost at 11000, you are in nosebleed territory and the stimulus deal is priced in + extra.  It always looks frightening to short when the SPX makes another new high since March and the uptrend has lasted for more than 4 months.  These are times when you get sudden downdrafts out of the blue, on either no news or trivial bad news that gets blown out of proportion due to the outsized effect it has on a vulnerable stock market. 

The 2 biggest uncertainties, a potential conflagration of the corona fire with school reopenings in September and the all important election in November will eventually come to rattle the confidence of the bulls, especially when the good news fiscal pork deal gets passed and there are no more goodies to look forward to. 

Here are the steps that happened/will likely happen before a waterfall decline: 

1) Breakout above previous well-documented resistance (SPX 3230, June top, start of the year level).  Check.

2) Pullback from the breakout to shake out the technical breakout players.  Happened on July 23/24 and lasted into the end of July.  Check. 

3) Make a marginal new high above previous high (SPX 3279 on July 22).  Happening in premarket as I write.  Check. 

4) Get investors bullish and believing that bull market is invincible after the marginal new high.  Tech earnings on Thursday got investors bullish on big cap tech. Have to wait and see what investors think about overall market in coming days.

5) Go back down to pullback levels from several days earlier, and linger at those levels for a couple of days.  Let's see if it happens after the stimulus deal is passed. 

Have a lot of dry powder to put to work, even though have a small Nasdaq short position.  Probably will put some capital to work today, and add more short Tuesday/Wednesday.