Delaying Capitulation

 SPX 3360 has been solid resistance in rally attempts the past 2 days.  SPX 3230, break even on the year, has been solid support.  But I don't see that range holding for much longer.  The longer the bulls try to hold off the flush lower towards 3130, the longer the correction will last.  Bulls are reluctant to throw in the towel because every selloff since March 23 has been met with aggressive buying and new highs, but this time is clearly different.  We had a blowoff top on September 2, so it will take time to consolidate those big gains from March to August.  The election uncertainty provides a good excuse for the consolidation. Negative catalysts are still there, in contested election and Covid second wave fears.  So we'll probably need some capitulation before the weak hands are cleared out and strong hands take the market higher. 

The eternal hope for a big fiscal stimulus package before the election has kept the market strong over the past few days, and has delayed the final bottom.  Pelosi and Mnuchin are talking everyday.  A lot of investors are still expecting a fiscal stimulus deal before November 3.  If we do get a deal in the coming days, then you can expect a short term one day pop that would be a monster short opportunity.  If a deal is going to get done, its got to happen by the end of next week because after that, its going to be campaign time and nothing will get done till after the election.

In individual stocks, I am seeing a resurgence in daytrader speculation.  There has been a plethora of pump and dumps over the past few days that was mostly absent for the past 2 months.  It shows that there is still a lot of greed out there and daytraders have not been scared by the correction.  Also, the put/call ratios are back to low levels over the past 2 trading days, after being mostly higher last week.  Investor complacency is still there, and it means we either need to scare them out with a quick plunge or wear them out with every 2-3 day rally being sold hard, until they give up on V bottom hopes.  

COT futures data also is confirming that most of the institutional money (asset managers) did not reduce their net long positions in index futures from September 15 to September 22, a period when the SPX went from 3401 to 3315.  Usually they sell on weakness, but they didn't this time.  So the bulls definitely haven't given up.

We have flat futures after the futures started selling off post Presidential debate, and coming back during European hours.  Most pundits thought it was a "train wreck", whatever that means.  Betting markets have increased the odds of Biden winning from 56% to 59%, after the debate, so overall, a slight negative for the market. 

Missed the short opportunity near SPX 3360, was waiting for a 3380 to short, and never got there.  Looks like 3380 is not going to happen before the next selloff, so if there is a bounce this week from this gap down, give it time to bounce to Thursday, I will definitely put on shorts, looking for much lower into next week. 

Bonds Not Providing the Hedge

Bonds aren't providing the usual risk hedge during stock market selloffs like it used to.  Part of that is because of the already low interest rates and the Fed's reluctance to go below zero interest rates, but it seems like most of this is because of investors' reluctance to buy too many bonds ahead of the election.   

For bond investors, they don't have fond memories of the 2016 Presidential election.  It was probably the biggest bond selloff from an election result that most people have witnessed.  That is naturally in the back of these investors' minds as they decide whether to buy bonds when stocks are selling off.  Usually bonds are the safe haven and a risk-off asset, but since the current market is mainly focused on the election, even bonds are considered too risky here.  

This inability to rally off of a stock market correction doesn't signal bond market weakness.  It just means that the bond market won't have many explosive rallies from current levels of 10 year yields below 0.7%.  To put it another way, the US Treasury market is half way to becoming Japan.  The JGB is a dead market controlled by the BOJ with low trading volume and low volatility.  Japan has killed volatility in their bond market.  The Fed is doing the same.  

This has negative long term implications for stocks because the 60/40 portfolio will no longer be as attractive when 40% of the portfolio in fixed income isn't providing much yield and doesn't provide much of a hedge for equity weakness.  This will in turn mean more portfolio volatility and make it more likely that investors panic sell stocks when they are plunging because bonds aren't providing the negative correlation hedge that sheltered portfolios from the storm.  

You can see the bearishness slowly building up as the put/call ratios are steadily rising but not yet at panicky levels, and the option volume this week is somewhat low compared to the past 2 weeks.  

We are on day 16 of the selloff.  Usually when a selloff goes past 13 trading days, it usually goes on for a full month, so we are likely looking at lower lows until early October.  However, we are short term oversold and near strong support at SPX 3200, so I expect a bounce in the coming days up to perhaps 3300-3320 by month end, and then probably the final flush out in the beginning of October down towards the 3100-3140 zone.  Next week is the first Presidential debate and that will officially kick off the all day every day election coverage which will only make investors even more nervous, as Trump will probably not go out quietly if he loses the election, and poll numbers and lack of undecided voters makes it highly likely that he will lose. 

Already Crossed the MMT Bridge

You know a country is on the road to becoming Argentina when politics is the most important factor for determining equity valuations.  Who would have known that Congress and the White House becoming pre-occupied with filling a Supreme Court seat would be the catalyst for a big gap down?  

Since when did Supreme Court seats move the stock market?  Its only because it reduces the chances of a pre-election fiscal stimulus package, which thus reduces the chances of Trump winning the election, which is a negative due to the likely higher corporate tax rates under Biden. 

All this market cares about is fiscal and monetary stimulus.  Company fundamentals don't matter.  Covid doesn't matter anymore.  Vaccines don't matter.  In fact, whatever it takes to get more stimulus (more job losses, virus cases going up, vaccine delays) are a net positive for the stock market. 

Trump is better for the stock market than Biden not because he's going to make America great again, not because he helps the economy, its because he is willing to tolerate even bigger budget deficits than Biden by not raising taxes and/or even trying to lower them further, with the same amount of spending.   The stock market wants bigger budget deficits because they lead to higher GDP, especially when the Fed is monetizing those deficits. 

There is no longer a negative feedback loop between bigger budget deficits leading to higher interest rates leading to lower stock prices.  When the Fed doesn't let interest rates go higher, the bigger the budget deficits, the better.  The weaker the dollar, the better.  The more dollars they print to cover the deficits, the better.  Because when assets are priced in dollars, and there are more dollars floating around for the same number of assets, asset prices go up.  Simple economics. 

Argentina, Zimbabwe, and various banana republics crossed the MMT bridge a long time ago.  The U.S. crossed the MMT bridge in 2017.  There is no going back.  Europe and China are more than halfway across that bridge.  Short term solutions don't solve long term problems.  Trees don't grow to the sky.  Last time I checked, there is a finite amount of resources on Earth.  I guess if Space X can colonize Mars, that will open up room for more growth.  

The sustainability of the current system is based on continuous economic growth, if that becomes impossible, then real interest rates have to be zero to negative to match zero to negative economic growth.  

We got a little flush out on Monday, and it probably marks a short term low that could last a few days.  But I fully expect another wave of selling as we are still on day 13 of the selloff, which has marked the end of a few of the selloffs since 2009, but not all of them.  I have a feeling this one will last around 22 trading days just based on the lack of capitulation and the negative catalysts still ahead (contested election the biggest one).  Considering the selloff started on September 3, 22 trading days would equate to selloff ending around October 5.  But since the election is on November 3, I would not expect a V bottom back up to all time highs.   

SPX is still way above the 200 day moving average which is just above 3100.  History shows that the SPX usually doesn't like to bottom too far away from the 200 day moving average.  I expect a bottom sometime in early October, and closer to 3100 than current levels. 

Still Dip Buying

 A little bit surprised by the big equity inflows for the past week.  You would figure a big shakeout like last week would cause some fund selling, but totally opposite of my expectations.  Biggest equity inflow over the past year, from @themarketear.  

ETF flows for the past week:  

This increases my conviction that SPX 3425 is a hard ceiling and we're likely to go much lower in the coming weeks.  But since we got a pullback yesterday, its right in the middle of the short term range of 3310-3425.  And I don't have confidence in buying dips, even at the low end of the range, because of the negative catalysts (pension rebalance at end of quarter, lack of buybacks, and election uncertainty).  So I will wait for any kind of rally to sell into, anything around 3400 would be good enough to put on shorts, although its looking unlikely to happen. 

Nasdaq has been especially weak during the past couple of days, which is another negative sign.  The small caps and beaten up sectors are too small to be able to move this market higher.  It has to come from tech to be able to move the market big.  

Bonds haven't really been able to go up despite the equity weakness the last 2 days.  It looks like after effects of a market disappointed in Powell.  This whole rally off the March low is based off of big government spending and Fed QE so if neither are beating market expectations, its going to be hard for the market to rally from these lofty levels.  

Trump is starting to get desperate, trying to get re-elected, saying that he wants Republicans to agree to higher numbers for the next stimulus package to get a deal with Pelosi and the Democrats.  But Senate Republicans are wary of giving in to Democrats and looking bad if Trump ends up losing in November.  The closer we get to election day without Trump catching up to Biden in the polls, the more likely Republicans in Congress will distance themselves from Trump.  

The wildcard is if Covid fear keeps a lot of Democrats away from voting on election day, and they don't bother going through the hassle of requesting and then filling out mail in ballots.  It is clear that Republicans are much more likely to vote in person than Democrats so that is a big advantage for them.

Fed Babies and the Dark Cloud

 It sometimes odd how these short term traders react to the FOMC meetings.  How do you get a big move higher and then a big reversal lower when nothing has changed?  Yesterday, going into the FOMC meeting, most traders seemed to be expecting very little, but did expect Powell to be dovish.  And Powell was dovish but didn't do anything, so pretty much what was expected, but the market was "disappointed".  Not enough "clarity".  These traders have become a bunch of Fed babies. 

The expectations are sky high for Powell.  His duties now include hand-holding short term traders so they don't have a tantrum because they didn't get to hear what they wanted.  The markets have been babied so much since the January 2019 dovish pivot that it is what the market expects.  And if it doesn't get coddled and told what it wants to hear, then the reaction is to sell.  That is what you saw after the June FOMC meeting when the market sold off huge the next day.  It is what you are seeing now after yesterday's FOMC.  

Both stocks and bonds have sold off on the news.  And so has gold.  That is the holy triumvirate these days.  It used to be stocks and bonds only.  But now gold is such a crowded trade that if it starts going down, it starts to affect stocks negatively.  Even when its such a tiny market in comparison to the stock and bond markets. 

The dark cloud hanging around in the background is the election.  Now less than 50 days remain till the big day.  The market hates uncertainty.  Frankly, I don't see what the big uncertainty is because we'll either have Biden or Trump, and they will both be spending lots of money and that is what the market wants.  But the market doesn't move based on how I think about things, it moves based on what the masses think.  They are afraid of a contested election.  The masses are scared of either Biden winning and raising taxes and Trump claiming election fraud and not accepting the results, or Trump winning and Biden claiming election fraud.  

In either case, eventually one or the other will be president and it won't affect the policy outcomes which will be MMT based government spending with the Fed buying up bonds to keep up with it.  I expect the market to eventually come to the same conclusion but probably only right before the election, so this correction should last for several more weeks.

SPX 3425 has been a hard ceiling for all bounce attempts.  I don't see that changing until election day.  Its possible you can get a slight break higher above 3425 but I eventually expect continued selling afterwards.  The bottom end of the range, towards SPX 3300 will be tested in the coming days as we'll have stock buyback blackout period coming up next week along with a big quarterly pension rebalance out of stocks into bonds (estimates around $150-200B).  In this type of environment, a big rebalance could really pressure stocks lower.  I don't see so many willing dip buyers anymore.  The technical damage over the last 2 weeks is substantial.  From past parabolic blowoff tops (e.g. Jan-Feb 2018) , the selloffs usually last longer than the flattening uptrend and then sudden drop type of selloffs (e.g. Aug 2019).   

With the big gap down today, I am just watching but any rally attempts in the next few days should fail quickly.  Wanted to short this Friday hoping for the market to hold up until then but that doesn't seem likely.  I don't see the bottom for this selloff until you get closer to SPX 3130.  The market is still way above the 200 day moving average, and that has acted like a magnet drawing prices closer toward it in selloffs.  Right now, the 200 day MA is around 3100, so still lots of air underneath.  The market has rallied so strongly over the past 6 months that consolidation will likely take longer than your usual corrections.  1.5 - 2 months is around what I am expecting, so we should hit bottom sometime from mid to late October. 

Positioning, Environment, and Zeitgeist

 The short term stock trading game is mainly affected by positioning, the current market environment, and the prevailing zeitgeist.  Let's go into each factor one by one.  

Positioning

The are a few good sources for this, but the main ones that I like to look at is CFTC Commitments of Traders data and put/call volumes and current gamma exposure.  Here is the latest COT data for S&P 500 futures and Nasdaq 100 futures:

 S&P 500

Nasdaq 100

The main group to follow are the asset managers.  Big net long positions for asset managers usually means that institutions are positioned heavily long, and vice versa for small net long or net short positions.  Right now, asset manager longs in SPX futures is moderately long, not yet extreme.  Same goes for Nasdaq 100.  Last week took a big bite out of Nasdaq 100 long positioning.  

Given the price action, positioning is about neutral, so no signal from this.  

Put/call ratios were very low througout August but have risen signficantly since September 3.  Not yet at extreme levels but the CBOE put/call ratio was at 0.83 on Friday, high enough to show signs of caution and give a moderate reversal signal.  

Slight bullish factor.

Current Market Environment

Its a strong uptrend.  Rising 50 day and 200 day moving averages for both SPX and NDX.  Blasted through to a new all time high earlier this month, and despite a big pullback, still too early to say that momentum favors bears.  The pullback cooled down ebullient sentiment towards stocks, and we are closer to strong support levels at 3230 and 3300. 

Bullish factor. 

Zeitgeist

Investors still have a total and complete faith in the Fed to do whatever it takes to keep asset prices high, will keep doing QE and may expand their program if stocks go into a downtrending phase.  Still strong belief that there will be lots more fiscal stimulus regardless of what happens in the upcoming election.  Definitely some complacency and bubble type behavior looking at the phase shift lower in day to day put/call ratios and volumes.  Retail traders are believers in stocks again.  This probably keeps a bid underneath the market until economy strengthens enough to make further  fiscal/monetary stimulus unlikely.  This looks like a growing bubble environment reminiscent of 1999.  

However, a huge event with lots of uncertainty in the November election will keep sentiment subdued and will probably cap the upside.  This will become a bigger and bigger factor as we get closer to the election.  Peak election angst will probably be during October.

Neutral factor now.  Bearish factor in October.

We have the FOMC meeting on Wednesday, which is the big event of the week, and then triple witching expirations on Friday.   Usual pattern is to rally into FOMC meeting, and selloff a bit afterwards, but with futures and options expiration on Friday, that is usually a bullish force on the market.  

Play the range, as market consolidates the big up move over the past 6 months, and with lots of resistance at these lofty levels.  Upside is probably capped at 3450-3470, and downside until end of month is probably capped at 3300-3320. 

More Coronavirus = More Fiscal Stimulus = Higher Stock Market

It's time for a reality check when it comes to who moves markets and who doesn't.  Retail traders are not the ones that have caused a Nasdaq bubble.  They are like the dumb money version of high frequency traders, moving markets in the very short term, over a 1 to 5 day time frame, which is about the length with which their call options impact the market, but having no impact on longer term movements.  

Thus, by deductive reasoning, you cannot gain any significant long termpredictive advantage from looking at put/call ratios and options volume.  However, You CAN gain short term predictive advantage from looking at that data.  And considering the post cliff dive 3 day average of prices for the retail favorites such as AAPL, AMZN, MSFT, TSLA, and FB are much higher than current prices, the dealers have taken off most of their hedges by selling stock to match the dropping delta of the outstanding options contracts.  Since most of that is done, there won't be much more selling pressure unless you get institutions panic dumping shares this week.  I would not bet on that because we are very close to strong support at SPX 3300, and NDX 11000. 

The past 3 days was both a combination of parabolic markets hitting a top and crashing lower, and a growing wariness of holding on to overvalued stocks ahead of the election.  Nothing else matters from now till November.  Vaccine news are just distractions.  Covid and vaccine news is yesterday's story.  The driver of the stock indices will be the election and political fallout from it.  Fiscal stimulation is the only fuel that can move this market much higher.  Organic growth is gone for the long term.  

The US is moving towards the Argentina phase of its maturation cycle.  With no natural economic growth, growth will be maintained through massive deficit spending and central bank money printing.  That is why all eyes are focused on the election.

  And whoever wins, a lot of money will be spent in the next 12-18 months.  The US has become the first developed country to become an MMT country.  Japan may have a huge public debt/GDP ratio, but the BOJ has actually been quite conservative when it comes to M2 growth, as Japan easily has the lowest M2 growth of the G20 countries over the last 20 years.  

The US is a different story.  Not only will it end up having the highest public debt/GDP ratio when the dust settles over the next 20 years, it is already embarking on a huge M2 up cycle which is likely to continue considering the obsession with more stimulus funded by Fed QEs and disregard for deficits or funding budgets with increased taxation.  

Anyway, the big move over the next 12 months will be up, so that is always in the back of my mind as the Argentina of the Northern Hemisphere gets rolling and doing helicopter drops, mainly to maintain political power.  Fiscal stimulus is all about politics.  The politicians could give a rat's ass about the plebeians that make up 90% of the country now.  They only care about the stock market, and staying in office.  Pandering to the public will become more blatant as the years go by.  Deflation is impossible.  All roads lead to inflation which will be underreported as usual to give the Fed an excuse to do massive QE to monetize the fiscal deficits.

We had "bad" vaccine news after the close yesterday, and it just reinforced that SPX 3300 is a buy zone.  As I mentioned earlier, Covid is yesterday's news.  It is not going to move the market for more than a couple of hours at most.  Market now sees Covid as a friend, not an enemy.  More Covid cases = more fiscal stimulus =  rising stock market, especially Nasdaq.   

So actually a Covid vaccine would be a negative for the stock market!  It has turned into the most perverse bad news is good news stock market regime.  The more Covid deaths you get, the bigger the fiscal stimulus gets.  That is what the stock market wants.  It could care less about the unemployment rate.  Or the mortality rate.  Half the population could die off as long as you had more and more stimulus the market would go higher!  Economic data is for the birds.  The dodo birds that are extinct in this market.  They have been killed off with the relentless rallies on bad economic news over the past 2 years.  

I am not bullish on a month long time frame, but I do see room for a BTFD bounce starting today or tomorrow, and lasting into the FOMC decision next Wednesday Sept. 16.  

The playbook is to buy SPX 3290-3320, and sell SPX 3450-3480.  The trending market is over.  It is going to be range bound till the election.  The stock market will gradually price in election uncertainty as the days get closer to November.  It is going to be tapebomb central over the next 2 months, with the outcome of the election not to be decided until several days after election day.  The US government is still a technological dinosaur, so don't expect any quick election results with the high number of mail in ballots. 

It's a War Zone

The stock market is drawing blood.  First it was the bear's blood and now it's the bull's blood.  Heavy casualties out there.  They don't make markets like they used to.  The parabolic rally up to SPX 3580 yesterday and then the big time dump today is uncommon.  In fact, I have never seen it before.  Usually you get a small range consolidation day or two after an all-time high.  Those days are gone.  These markets don't take their time changing trends.  Its straight up and then straight down.  Tough markets. 

Those trading off of historical patterns are going to be caught off guard by this market, because it doesn't trade anything like what I've seen before.  The trading patterns are not something that would result from humans trading, but from algos running wild and having their way, moving prices as far as possible, to the breaking point, to run as many stops as possible.  Its clear that human based trading volume is too small to counter the algo-based forces at work.

Mean reversion trading has gotten decimated in the past 60 days, and its been a bloodbath.  The pain is real, I will not sugarcoat it.  But there's no crying in baseball, these are the markets that we will have to adjust to in the future.  Its not going away.  One thing is clear:  daytrading using mean reversion strategies will get you killed in these type of markets.  Talk about picking up dimes in front of a bulldozer.  And there are a lot of bulldozers running around in these markets.  You had a bulldozer from Tuesday to Wednesday close on the upside, and then a bigger bulldozer from Wednesday close to now on the downside.  Those humans trying to pick up dimes in between are getting run over.  

I have basically just given up on daytrading the SPX, the past patterns don't work well enough and its more suited for trend trading now, unlike before.  Swing trading still works, but you've got to take smaller positions and allow for bigger moves to go against you because these algos will take things to the limit to test the counter trend traders.  To test the humans taking the other side of their trades.  

Still deep in the red on the Nasdaq shorts, and looking for a somewhat graceful exit if the SPX gets close to 3400.   There is an air pocket from the alltime highs at 3580 to 3400, as there was very little time spent on that move up.  That will have to change, as we fill in the air left behind. 

 It is a war zone.  I'll have to regather the troops, take some losses around 3400-3420 zone, in order to put out the shorts again on a bounce, to make some points in the coming chop.  I expect a choppy range to be formed over the coming weeks.  Chop is more favorable for my style so I'm going to have to make up for past losses.  Anyway, looking for one more push lower from current levels of 3460 down towards 3400-3420.