De-Risking Week

They always come up with convenient reasons for a selloff.  This time its a combination of the new lockdowns in some European countries and now the AAPL earnings that disappointed.  

Are we looking in the rearview mirror again and afraid of another Coronavirus panic episode?  I don't think any investor thinks this virus will just go away, the market will eventually ignore it, because of 1) less of an unknown.  2) lower death/hospitalization rates per case, 3) coming vaccine announcements.  If the election uncertainty is resolved quickly, like it usually is, with a Democratic sweep, then you are looking at investors looking to add back longs to front run the big stimulus deal in early 2021.  

And the polls are probably much more accurate this time than in 2016, mainly because there are many fewer undecided voters so that leaves less room for polling error.  So far, there has been a big increase in voting so far in 2020, compared to 2016.  And a high voter turnout is advantageous for the Democrats, because those less likely to vote usually lean Democrat.  So I am expecting a Democratic sweep.  It also hurts Trump that the week before the election, you have a big drop in the stock market and also rising Covid cases.  It looks like a perfect storm set up for a blue wave. 

I am positive on the market now until year end, mainly because we are entering the election oversold, with strong support at SPX 3220, and with a lot of uncertainty that will be going away in November.  Also, seasonally, November is the biggest buyback month of the year, so that usually makes it a strong month for equity returns.  

And finally, we are getting some of the weak hands out of the market this week, going into the election, as I was wary of buying because of the new fast money longs that entered in early October.  With the selling this week, I expect a lot of those longs to have been stopped out or just liquidated ahead of next week's big event.  

I think investors have been holding off on going all in until after the election, for fear of a contested election and riots and chaos.  And with the virus raging across the US and Europe, people will mostly be staying home and doing what?  Their new hobby:  speculating in the stock market.  It is a dystopian version of the 1998-2000 dotcom bubble, where bad news is good news, because it leads to more government stimulus and money printing.  

Put on longs over the past couple of days, looking for a rally starting next week that should last throughout November. 

European Covid Panic

European equities have been lagging the rest of the world for the past few months and its finally coming to a climax.  While the SPX is still above 3300, the Eurostoxx 50 has broken 3000, a big psychological support level, to make a 5 month low.  Back in the 2000s, the Eurostoxx 50 index value was actually about 3 times higher than the SPX.  Now the SPX has overtaken it and left it the dust.  

Clearly we can see that the main variable going forward is fiscal stimulus, because in Europe, there are no signals of additional government goodies coming down the pike, but in the US, especially if you get the most likely election outcome, a Democratic sweep, a big fiscal stimulus package is coming in early 2021.  

Both Europe and the US are Covid basket cases, with Covid cases raging out of control, unable to stop the virus like many of the Asian countries.  But for the stock market, the US markets are pricing in a lot of additional fiscal stimulus, but the European markets are not.  Unlike the US, Europe still actually seems to care about budget deficits, and that's limiting the amount of government spending.  While the US is already well on its way to being an MMT country and using the Argentina playbook of giving people what they want and not raising any taxes to fund it.  

I am sure there are still a lot of investors that are still fighting the last battle, as there always is, looking at the rear view mirror.  But the coronavirus is well known now, and most of the future catalysts will be positive in regards to it, because of all the vaccine announcements coming up.  

When I see tweets like this, along with the big gap down, it signals that there is some panic in the market.  Anytime you see trading tweets about riots, that a contrarian indicator.  When there is panic, there is opportunity, and I will be buying stocks today and selling vol as I expect that this selling will be short lived.  If this selling was happening in the absence of news or coming big events, then I would be more wary of buying the big gap down.  But its clear to me that the overbullish positioning from a couple of weeks ago is being pared down and that risk is being taken off ahead of the election.  By either tomorrow or Friday, most of the positions will have been reduced to sufficiently comfortable levels ahead of the big event.  That should give us a bounce from Thur./Fri. to Tuesday. 

Meek Sellers

 The selling in US stocks is just not very aggressive.  Monday was the day for the sellers to crack the market wide open and finish near the lows.  Instead, you made an intraday V bottom and rallied all the way to the close, with SPX closing above 3400.

The bears had a golden opportunity yesterday, you had a bunch of stops being hit when SPX went below 3400, and you had the "scary" news backdrop of no stimulus progress and Covid cases rising globally.  And yet the bears kind of blew it, turning a 12 yard gain into an 8 yard gain, still unable to get that first down.  Some would say that's an encouraging session for the bears but I view it as the bear's last great hope before the election and they didn't do enough damage to put fund managers in a tough spot ahead of the election.  

Instead, fund managers are still sitting on good gains and feeling less fearful now, and unlikely to dramatically reduce their current risk levels going into the election after seeing how controlled the selling was.  

You saw heavy put activity in VIX options, which is unusual for such a big down day.  That's how bold these bulls are.  They are quite a cheeky bunch, they will buy VIX puts on dips, something that you didn't see much during past selloffs.  And I do agree, I can't imagine a VIX going much higher from here considering how weak the selling is.  There has been no sustained selling pressure despite being in a 3 week downtrend.  That is not typical, and it is a sign of strength for the SPX.  

Usually VIX options traders are smart money compared to equity options traders.  And VIX put option volume has overwhelmed call option volume over the past month.  

I did close some of my short position yesterday, and will close the rest of it today on any morning dips.  I am almost done with the short side till at least a few weeks after the election.   I will be leaning long starting from tomorrow.

Pre-Election Positioning

 This week will be mainly focused on investors getting to their pre-election level of risk, which is in many cases, lower than they're current risk profile.  I can't think there are too many investors who want to increase their current risk levels into the election.  

The big up move from the September 24 bottom up to the top on October 12 was a mixture of longs trying to buy ahead of the election on the idea of a Democratic sweep in the election leading to big fiscal spending in 2021 and massive short covering.  Looking at the CFTC COT data, there was a lot of new buying and short covering in S&P 500 and Nasdaq 100 futures over the last 3 weeks.  

And last week didn't seem to reduce much of that long positioning, so I think they will end up selling any short term positions this week and reduce risk.  Especially if SPX can break 3400 and go below last week's lows with conviction.  Just from the technical analysis I'm seeing done out there, a lot of these short term traders are bullish above 3410, and bearish below it, so its very likely that you see a stop hunt under 3400 this week to see what the bulls are made of.  I still believe there are some weak hands on the long side, even though they have been sticky buyers of dips over the last 2 weeks.  Usually the final move before the bottom is fast and causes a little mini panic before you can reverse higher.  

On the news front, the clowns in Washington DC are still trolling everyone with their optimistic talk on a stimulus deal before the election while coming up with no concrete evidence of progress.  Its all vague, and meant to pump up the stock market to seem like they are trying to make a deal, when in reality, Pelosi is holding on to all of her demands and Trump/Mnuchin just don't want to swallow their pride and completely cave in to her.  And that's even before it gets to the Senate, which is unlikely anyway to pass that chamber of Congress.  

Anyway, its all about pre-election planning this week, and that should favor the bears in the first few days.  Staying short, and waiting for the stop hunt under 3400. 

Bear Time Window is Closing

 There is a sweet spot of bearish activity going into a much anticipated event.  That sweet spot is usually 1-3 weeks ahead of the event.  Investors just don't wait till the last minute to hedge or reduce risk ahead of a big event like a Presidential election, so if they do sell or buy puts, it will be during this time period.  

This selling pressure is what has been bringing the market steadily lower since the local top in SPX on October 12.   Almost 2 weeks have passed since then, and the market just hasn't made a big pullback since.  Given that there is still more than a week ahead of the election, there is still a little bit of time for the sellers to get to work and for investors to get a bit more nervous, but I give it 3 trading days, or until next Tuesday before you have to lean bullish.  

Its a tricky moment to be bearish here, the time window for further weakness is at most 3 days, and there is a small possibility that yesterday was the bottom before you grind higher into the election.  But given yesterday's rally, the SPX around 3460 is kind of a neutral zone, it doesn't have that much room to squeeze higher over the next 3 days due to election uncertainty but stocks have been hanging tough and bulls have been tenaciously defending support levels and aggressively buying dips.  

Perhaps its the hopes of a stimulus bill getting passed before the election that is keeping the bulls active on these intraday dip.  If that is the main reason, I see a potential final selloff that breaks SPX 3400 if there is no deal by next Monday which scares out the fast money traders, possibly getting down to 3360, the gap left behind after the Trump flip flop on stimulus 2 weeks ago.  

I am no political expert, but I have seen quite a few of these political "negotiations".  And usually they end up with a deal, but this time, its not something that is a foregone conclusion like raising the debt ceiling or even the fiscal cliff.  And the behavior is quite different.  The main person who will decide is Pelosi, and she seems too optimistic but acts really slow.  Taking her time, and not putting any pressure on the other side.  Its a bunch of happy talk, but she doesn't budge and compromise.  No wonder the Senate Republicans hate Mnuchin, because he's basically caving in at every moment, trying to keep the stock market up while agreeing to everything that Pelosi wants.  

And does the top Democrat, Pelosi, really want to give Trump a big boost ahead of the election by signing off on a huge stimulus bill?  Maybe she does, if she thinks it will help keep her as Speaker of the House for much longer, because which ever party wins the White House in 2020, usually loses a bunch of Congressional seats in 2022.  

What usually happens if these politicians really want a deal is that they sound really pessimistic, almost as if they are willing to walk away, to put pressure on the other side to cave in, and then make a deal.  This time, the words of optimism don't match the turtle like actions.  And time is running short, there are only 11 days left till the election, so if they keep doing this next week without concrete actions, the market will see right through it and assume there won't be a deal before the election.  

One thing that is helping me stay bearish is the weakness in bonds and the Nasdaq stocks lagging the market.  Nasdaq is the leader, not the SPX.  If the Nasdaq is lagging, the SPX will have a hard time sustaining a rally.  And with Treasuries acting this weak, its got to be putting some pressure on fund managers here ahead of the election, making them reluctant to buy stocks as they are losing on their bonds.   Staying short, but maybe just a few more days. 

Stimlus Hopes

For the White House, the stock market is their score card, or is it their plaything where they buy and sell in anonymous offshore accounts to take advantage of headlines that they make?  I am no conspiracy theorist, but something smells fishy when Trump/Mnuchin/Pelosi make either "positive" or "negative" market moving comments on things like trade deals and stimulus when after most of them, they ending up meaning nothing and just end up being short term market movers.  

Are we having fun yet with these daily stimulus updates?  These politicians, absolute scumbags, who think that they are doing the public a big favor by giving them $1200 checks while trillions more pour into who knows where to feed the beast, never to be seen by the public, which feeds the Washington swamp in a grift cycle that has gone into overdrive in 2020.  

I thought they would agree to more fiscal stimulus a while ago, but with the stock market doing well, obviously the politicians don't feel any urgency to act.  What probably happens is that they do get a deal at the last minute before the election, but then the Senate decides to delay the vote till after the election to save those that are against the bill but don't want to have to explain that to an angry public during the election campaign.  

The politicians are masters at pleasing the market, because that's all they've tried to do over the last 4 years, while doing almost nothing.  So its more of the same till the election.  Keep hope alive, always kick the can and keep the carrot in front of the donkey so that he keeps moving forward, but don't give him the carrot, because once its gone, then the donkey stops.  

It is interesting to note that from last week's CFTC data, you saw a lot of short covering in Nasdaq 100 and S&P 500 futures from large speculators.  It seems like the more bearish large speculators have mostly thrown in the towel on looking for more downside and have reduced risk ahead of the election.  I don't get the same feeling from those large speculators that are bullish, as I am still seeing relatively low put/call ratios and big bets for a lower VIX in the coming months.  

And it seems like an optimistic spin is put on almost every bit of news, where its Biden building his lead in the polls which leads to Dem sweep speculation, or whether its the daily Pelosi pumps about stimulus, etc.  Yet here we are, grinding lower since last Monday.  And despite that, Treasuries can't seem to catch a bid, and keep getting sold.  Clearly, fund managers are looking past the stimulus headlines and preparing for the election and the aftermath.  Really, if the stimulus was behind us, the market probably would have already bottomed, but its that crack cocaine hopes of more stimulus that keeps the bulls invested, hoping for a big pump on the news of a deal.  

I am going with the price action and staying short until I start seeing some negative headlines and/or signs of worry.  I am seeing neither yet.

Stimulus Zombie

We get another healthy gap up as Pelosi must have seen the final hour dump in SPX futures to try to pump up the markets over the weekend being "optimistic" about getting a fiscal stimulus done before the election.  There is only 2 more weeks of these garbage headlines that we have coming before everyone can finally move on to garbage Pelosi/Biden rumors of big stimulus.  

The US stock market which used to move at the whims of the Fed, now move at the whims of politicians in Washington.  The Fed is a given, QE machine, so they are taken for granted now.  Wall Street is now trying to force its wants on Capitol Hill, demanding more and more stimulus.  This is just the beginning.  It will only get worse over the next 4 years, especially if you get a Democratic sweep, as they seem to care even less than big deficit loving Republicans about blowing out the deficit as long as they can spend the money on their pet pork projects.  

Talk about the fall of your once great empires.  It used to be the excitement of new technology that fueled giant bubbles (dotcom boom) in the US, now its the excitement of free money raining down on Wall Street from politicians that gets investors excited.  

I am fighting a very strong uptrend by being short, but the election is sort of like a safety valve, at least for the next week, because fund managers hate uncertainty, and no matter how lopsided Biden is winning in polls, there is always that lingering doubt in the minds of traders who are afraid of either a Biden win and a Senate majority for Republicans, or worse, a close election won by Biden that is heavily contested by Trump.  And with all the new found optimism over the past 3 weeks, it seems to have hit a peak last week, and that should give room for some downside this week.  Even with Pelosi trying to talk up the stock market, and her 48 hour deadline to the White House to get stimulus done.  

I guess Trump could just say eff it, give Pelosi everything she wants and try to get it passed before the election hoping it gets him re-elected.  And that could provide a short term pop in the market but since this market has been grinding higher on stimulus hopes for what seems like forever, I would view that as a sell the news event ahead of a potential contested election.  

Remain short, expecting one more shot of volatility before the election. 

Sticky Bulls

There are a lot of die hard bulls out there.  That isn't necessarily a bearish thing.  You would think that if bulls are so stubborn and widespread, that the buying is getting near saturation and they would have to become sellers soon, and a bear phase is coming. That's not usually the case.  

From past experience, it's actually better for bears to have bullishness that is widespread but with low conviction. Right now, the bullishness is widespread but with medium to high conviction.  Usually, markets top out several weeks after a peak in bullishness.  So if the bullish psychology persists and grows stronger, as it appears to be the case, that means the ultimate top of this bull move from the March low is still probably coming in the future.   

The only reason that I am short is because the election is less than 3 weeks and I expect the fast money which put on positions this month to liquidate a lot of those new positions ahead of the election.  That should bring some selling pressure for the next 1-2 weeks.  

I am hearing that many brokers are raising margin requirements ahead of the election due to expectations for volatility around the event.  The higher margin requirements could cause some traders aggressively positioned to reduce their positions to avoid margin calls.  Especially if we start going lower from here into the election.  

In the small cap space, I am starting to see a lot of speculation in pump and dumps again.  It seems like the daytraders in the small cap arena took a break from the beginning of August to end of September, and have come roaring back in October. 

There is really only about a 1 to 2 week window here for bears to get to work, they did a little damage this week, but the bulls have been paid to buy any 2 day dips and that's what they did yesterday, and are continuing today.  Due to the stickiness of the bulls, I don't think the SPX can go below 3300 in this brief window where bears will have room to get to work.  The price action is too strong and the bull crowd has so much conviction that a lot of them will be willing to buy a dip down towards 3350-3400 and not feel nervous about it.  

Staying short, but probably only for 1 or 2 weeks more.  Post opex next week should expose some investors with fewer put hedges so that could bring selling pressure.

14 Trading Days Since the Bottom

We've had sufficient time and price action to get investors bulled up since we hit the bottom in late September.  The news is not moving the market, its greed and the fear of missing out (FOMO).   The FOMO is so great that it is probably greater than the fear of losing.  Usually you don't see these V moves higher so far ahead of a much feared event, if they happen, its usually the few trading days right before the big event, when almost everyone has already hedged or pared down risk levels ahead of the event. This time, its actually feels like investors are risking up into the event, expecting a Democratic sweep and a giant stimulus passing early next year.  

The market has taken a glass half full view of the election ever since that disastrous debate for Trump, thinking that a contested election is now off the table and Biden will win easily.  While I don't disagree, there is still the uncertainty of how the Senate races will play out, and the risk is still there that Republicans maintain the majority in the Senate even with Trump losing.  That would be a disaster outcome because Republicans will not play ball and agree to a huge stimulus deal to help Biden.

Since we are so close to all time highs, and we've rallied 300 SPX points off the bottom in less than 3 weeks, it seems like a good risk/reward trade here shorting with the election uncertainty providing a possible excuse to selloff the market in the next couple of weeks before the big event.  I cannot imagine the market being so accomodative to new bulls here and just go straight up into a monster event risk situation.  Anyway, I added to shorts yesterday with a target of SPX 3400-3410 by next week. 

Growing Optimism

 The past week, as the SPX went from 3300 to almost 3500 now over the span of 6 trading days (3300 during European hours when Trump was diagnosed with Corona), was a classic fear to greed move off a V bottom, but at twice normal speeds.  When the players in the money game have seen the pattern so many times (V bottom), they don't waste time putting money to work and pile in as soon as they can.  They know that there are no dips during these V bottom setups, so 1) they don't have to worry about much drawdown from entering near local tops, and 2) the sooner they buy, the better the prices they will be buying at to catch most of the move.  

Thus, when these patterns have repeated for so many years and with algos programmed to catch these V bottoms by aggressively buying after a V thrust like you saw from September 25 to September 30, there is too much eager money looking to buy for there to be any lasting dips during the uptrend phase.  And if there is a lasting dip, that makes the odds of a short term trend change all the more likely than in the past, when indexes traded with more choppiness.  

The question is when does the uptrend phase from September 24 to now, going on 12 trading days, run its course, and reverse to form a playable pullback.   In the past, you could be a little bit patient with trying to pick tops off these V bottom thrust moves, because the trend usually flattened out before it would reverse (see SPX chart for July 2019, September 2019 for 2 recent examples).  But the last 2 pullbacks off of a bottom thrust move (June 2020, Sept 2020) came right after a blowoff, parabolic top with no flattening of the uptrend before the reversal lower.  

The ideal short entry point would be to get in after confirmation that the uptrend is over, and before the sharp pullback lower, but in the last 2 cases, there was almost no time to get in after price confirmed that a pullback was underway, because the market fell off a cliff on June 11, and September 3.  So unless one was either already short, or is comfortable shorting into the hole, expecting a bigger hole, you missed those moves.  

You can only get better at the money game if you learn from past mistakes and try not to repeat them.  But also a recognition of what part of the cycle that we are in is a good guide to how far a pullback will go, how pessimistic the crowd will get before hitting the bottom, and how eager the crowd is to buy after the bottom.  

This part of the cycle, the late bull market phase, but less than a year after a traumatic drop in the market (March 2020), is usually a steady uptrend marked by quick, and brief pullbacks that don't get most of the crowd truly scared, and just a little bit nervous. That type of market gives short positions very little margin for error, and only a small window of capturing a profitable move lower, while giving longs a big margin for error, and a large window of profitability on trades.  

Its like the baseball hitter who has a flat swing through the strike zone, less likely to hit a home run, but more likely to make solid contact and hit line drives (going long), versus a hitter with an uppercut swing that doesn't stay in the strike zone as long, but has a higher probability of lifting the ball in the air and thus, hitting home runs, but more likely to miss and strike out (going short).  

Right now in this part of the cycle, going short is just a low probability trade, and the only reason I did go short was because I viewed the election as a backstop which would control the amount of upside this month.  But with Biden just crushing Trump in the polls, the market has sniffed out a Biden blowout along with a Congressional sweep for Democrats which is very likely to happen so obviously a lot of uncertainty is being priced out of the market, thus the lower vol and higher SPX prices.

I still think there is one last minute scare before the election to provide a graceful exit for underwater shorts but it probably will have to wait till after October opex coming this Friday. 

The price action is just too strong here to go all in, although if I didn't already have some shorts on, I would considering starting a short position today.  So I will wait to add, it is greed controlled market, so fear of missing out plays a bigger part in price movement than fear of losing. 

Trapped by Trump

One thing you can't do when you trade:  believe Trump.  Even knowing him to be a compulsive liar, and a slave to the stock market, I didn't think he would be so easily spooked by a 1.5% drop in the stock market, and backtrack so fast on his "tough stance".  He got me.  His flip flopping got me trapped on the short side.  But more than that, started shorting too early, and got too eager, a big mistake in an uptrending market, when I should have waited for the prices that I wanted.  Now, its too late to backtrack, as we're getting to levels and the number of days since the bottom point to a likely short term top very soon, and a pullback ahead of the election, probably to SPX 3300-3320 area.  If things get really wild, it could go back down to SPX 3230, flat on year, but that's unlikely.

Does Trump wanting a bigger deal mean that the fiscal stimulus deal will get done before the election?  If it is to get done at all, Trump is going to have to complete cave to Pelosi and give her everything she wants.  There is no incentive for Pelosi to give in to Trump and his only hope for a chance at re-election is to give everything that she wants and try to get his name on those $1200 stimulus checks one more time before the election.  

So he probably will cave in eventually,  when the stock market is down a couple of days in a row.  Does it mean the fiscal stimulus passes before November 3?  It probably will get passed, but if its going to pass, its going to be a Democrat backed bill with a few sell-out Republican congressmen looking to get re-elected voting for it. 

In any case, it looks like the market is seeing through all the noise and has basically taken a contested election off the table, because Biden has an enormous lead in the polls, and Trump is basically finished unless he wants to try to play spoiler and scream fraud and use the conservative leaning courts to do him some favors to try to throw out the mail in ballots to give a hail mary chance of winning.  

Looking at the action in the small cap space over the last 2 weeks, the animal spirits of speculation are back with a vengeance.  The institutions and retail are in 1999 mode, looking to speculate and bet on big moves higher.  That's the market at the current stage of the long term boom bust stock market cycle, its been 11 years of a secular bull market, the longer it lasts, the more speculative fever hits the population.  It is something I am well aware of, and do expect a bigger bubble after the election results.  

Many are already jumping the gun, expecting a Dem sweep and a monster stimulus package in early 2021 and are chasing high beta small caps.  I believe many of these chasers will be shaken out during the next pullback.

While the election does offer a small risk-off window this month, overall, it looks like it will go much higher after the election results come out, just because of the bubble dynamics of this market, trading similar to 1999.  And remember, 1999 was the prelude to the biggest stock market bubble top of all time, 2000.  I think that will be repeated in 2021 so I'm not going to be stubborn on the short side.  I'll probably be trading mostly on the long side starting in November till next February. 

Still short a half position, and looking to add in the coming days.  I expect one election worry selloff later this month, and that's probably it for any meaningful downside this year. 

Fiscal is the New Monetary

 Monetary policy was really the only game in town from 2000 to 2016.  Fiscal policy was tame, small, and lacked the eff-you factor that the Fed has had since 1987.  

The Fed could care less about precedent, about sticking to conservative views of monetary policy.  The lack of bubble fighting in the late 1990s and the turtle like pace of rate hikes under Greenspan in the mid 2000s.  The ridiculous and continuous amounts of QE under Bernanke.   The turtle like pace of QE purchase tapering under Yellen.  And the $75 billion per DAY of QE (that's a $1.6 trillion per month pace!) under Powell during the beginnings of QE infinity in 2020.  

The Trump tax cuts paid for by nothing in 2017, along with a big increase in the government budget was the beginning of the end of conservative fiscal policy.  Now the Republicans are spending almost as much as the Democrats but without the tax increases (rather, its tax cuts) to pay for it.  And now the fiscal response to Covid with $5 trillion in spending financed by the Fed's QE over 6 months is straight out of the Bazooka Ben playbook.  Moar.  

Yesterday's tweet bomb from Trump is not going to matter in the long run, because it does mean less fuel for the economy till at least January.  With Biden building up an even bigger lead in the polls after the first debate, it looks like the election is pretty much a wrap.  All that is left is to see how Trump reacts to being told he lost.  Will he rant about election fraud and try to persuade his governor buddies in the swing states to take the case to court and pay off some judges to get a favorable verdict?  Will he try to take it to the Supreme Court and hope that the conservative judges will rule in his favor?  That is about the extent of the uncertainty for now.  

One thing is for sure, he won't sign off on a stimulus package that the Democrats will want if he loses the election during his lame duck period.  That means there likely won't be a stimulus package passed for at least another 4 months.  And the virus hasn't gone away, so that could spell short term trouble for the markets. 

Election uncertainty is still there.  If there is no Dem sweep, with Biden winning and Republicans holding the Senate, that fiscal stimulus package that Biden wants to pass is going to have to get much smaller in order to pick up Republican votes in the Senate.  So that would be a negative for the market, which is jumping the gun here and thinking that the election is already over and that Democrats will dominate.  A lot of independent voters may hate Trump, but it doesn't mean they hate Republicans or like Democrats.  It is possible that Biden wins but Republicans hold their own in the Senate races to form gridlock on Washington, something the market absolutely doesn't want.  

We have a what me worry? gap up in the SPX after the big drop in closing hour yesterday.  I am half in right now on the short side in SPX.  Depending on the price action, I may add 1/4 more later this week and then the last 1/4 next week.  Market is quite complacent now so its going to take a bit more shaking before the bulls retreat.  No rush to add here, but do have plans on adding more under the right conditions.

Pumpty Dumpty

 When they talk about MMT, it is always in the future tense.  About possibilities, consequences, etc.  No, MMT is already here.  The US has become an MMT country ever since the Trump tax cuts extended the life of a moribund economy, injecting it with more narcotics and stimulants.  And it was solidified when Powell caved to the markets and started cutting rates and then doing QE  "lite" in 2019 and now QE "heavy" in 2020.  

If the US ever tried to get back to a balanced budget like it did briefly in 1999-2000, or like what Germany had for the past several years, it would enter a Great Depression part II.  The talk about the US being a strong economy and the cleanest dirty shirt ignores the artificial pumping going on to keep things looking normal.  

Everyone talks about how great it is to have tax cuts and low taxes and keep all the same government benefits but there is no free lunch.  Short term pleasure is coming at the expense of the long term viability of the US dollar as a "stable coin" to use bitcoin language.  The US dollar has gone from a stable coin with an increasing supply coming from monetary demands from an organically growing economy (1945-2000) to the early stages of a shit coin with an increasing supply coming from desperate monetary and fiscal measures to keep H(P)umpty Dumpty together and to keep the Ponzi Scheme going.  

All the money that is kept in the pockets of the top 1% from the reduced tax rates and increasing tax loopholes is coming from the issuance of US Treasury debt.  The US is sacrificing the US dollar in order to help the rich get richer, which as a byproduct is keeping the stock market afloat at record high valuations.  

And the lack of antitrust enforcement and the growth of oligopolies and monopolies in the US has ensured fat profit margins for corporations even when growth is very low.  Usually growth needs to be high for profit margins to increase, due to the fixed nature of many corporate expenses, but when there is almost no competition, higher prices ensure higher profits.  And the US government will lie through their teeth to keep the CPI and PCE numbers low, and proclaim that there is low inflation, just so that they maintain the public trust in a rapidly increasing supply of dollars and to keep inflation expectations low.  

The US has now reached the twilight of its empire, and just like the Roman Empire, the end comes through overspending, a costly military, and the debasement of the currency and inflation.  

To me, it is an absurdity that oil is trading below $40/barrel and the sand sheiks must be besides themselves having to try to talk up the oil price with various OPEC deals and cuts, etc. while the likes of Pelosi, Mnuchin, and Trump are talking about spending another $2 trillion, just 6 months after their previous spending spree.  If there ever was an exorbitant privilege in full view, it is this year, when the US government is spending like drunken sailors and the Middle Eastern oil countries are struggling to stay solvent as oil is trading like the US dollar is still on the gold standard.  

Right now, the most overvalued asset is the US dollar.  The most undervalued asset is oil. We are in a transition phase when the end point is still unclear to a lot of investors.  But based on 2000 years of history, when politicians don't care about the nation's debt and only care about keeping power, you get massive inflation.  That is an inevitability.  Coronavirus is the only reason that the end point is being obfuscated.  And the general public still hasn't experienced the break neck inflation that will make them question their desire for more and more fiscal stimulus.  It is coming, and in the words of Ernest Hemingway: 

“How did you go bankrupt?"
Two ways. Gradually, then suddenly.”

We have the reflexive gap up off of Trump feeling better, taking off some uncertainty risk, and now the main focus will be on if/when the fiscal stimulus deal is agreed to.  Trump seems eager to get a deal to get re-elected, so expect Mnuchin to start inching closer to what Pelosi wants, meaning the likelihood of a $2.2 trillion stimulus package is increasing by the day.  And if Biden wins the election, expect another stimulus package in early 2021. Why?  Well, because its popular, and because politicians nowadays like to spend money on the US Treasury debt credit card.   And they still have a convenient excuse in the virus.  Mo money, mo money, mo money.  

Looking for a potential move to 3400 and maybe even 3420 once the fiscal deal news hits the wires.  I plan on shorting that spike, expecting election angst to bring the market back lower later this month.  And if there is no deal before the election?  This is a very low probability scenario, but if that's what happens,  hide the women and children, you will have a widow maker and we are going to test SPX 3000. 

Stimulus Waiting Game

 Those politicians really enjoy dragging things out to the very last minute.  There is a lot of skepticism about a possible coronavirus stimulus deal happening before the election but now with Trump catching the virus, it may just speed up the process.  After all, it's Trump's decision.  He is trailing Biden badly in the polls, with only a month left, and all but the most die hard Republicans with their heads in the sand know that Trump is in a bad position.  

Trump has nothing to lose at this point, he might as well cave in to Pelosi and give her everything that she wants, because after all, most swing voters want more money, and he needs to throw everything against the wall and hope something sticks.  Because going with the status quo will basically assure a Biden victory.  

Just looking at the data, and compared to where the past Presidential polls were at in the month prior to the election, Biden has a very big lead over Trump, more importantly, has significant leads in most of the swing states that will decide the election.  

 

The numbers are looking really bad for most of these swing states, only Florida is within the margin of error, but even there, Biden has a 2.3% lead.  And Biden could lose Florida and Arizona and still win if he holds his lead in Pennsylvania, Michigan, and Wisconsin.  The other swing states are between 4-7% in favor of Biden.  And unlike previous elections, there seems to be very few undecided voters.  This is a Trump vs anti-Trump election.  Not many people are excited to vote for Biden.  But there are a lot of people that are excited to vote against Trump.  Biden could be a talking dummy and he'd still be ahead.  Most voters have made up their minds on Trump.  They either want 4 more years of Trump or they don't.  The next 30 days of campaigning or debates aren't going to move the needle.  

It is very surprising that most betting markets still show Biden as just a 3 to 2 favorite over Trump.  Given the polling data, Biden should be a bigger betting favorite.  There are still a lot of people with recency bias who view the Trump upset win over Hillary in 2016 and think that history will repeat itself and that there are a lot of shy Trump voters.  Unlike 2016, in which Clinton had a small lead and Trump was still somewhat of a unknown political entity, this time, Biden has a big lead and Trump is very well known.  The lack of undecided voters this time around makes the polls more accurate than they were in 2016, when there were quite a few who were sick and tired of establishment politics and decided to go with the wild card in Trump.  2020 is a totally different story.  

I have been waiting on the sidelines, expecting a fiscal stimulus deal headline coming out, for a chance to sell at premium prices, preferably around SPX 3420.  But those politicians are dragging things out.  I still expect a stimulus deal ahead of the election, which is why I haven't gone in to short.  Too much headline risk for me to take a position here.  I do expect any pop on a stimulus deal to be short-lived, it may only last a few hours.  

There has been a lot of short covering this week, as shown by the chart below.  This is because of the possibility of a stimulus deal.  Once that is out of the way, the shorts will come back to sell with both hands, and the longs will be reluctant to buy ahead of the election.  Expect another revisit to at least SPX 3220, and if things really get rolling, down to 3130.