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.