Bonds are Controlling this Market

You get these type of markets about once every 4-5 years.  They are not common.  A sharp bond selloff after a parabolic bull run the previous year.  November-December 2016.  June-July 2013.  May-June 2009.  The bond selling is front running either an economic recovery or a fear of a change to a tighter Fed policy.  By the time the economy actually starts getting better and Fed is getting tighter, the selling is usually over and bonds are actually a good investment again.  

In all 3 of those instances, 2009, 2013, and 2016, there was a lot more rally left in the stock market.  But I have a feeling this time is different.  The financial markets have gotten smarter.  They now mostly ignore ecoomic data releases like the nonfarm payrolls report and ISM and CPI reports.  They know now that its better to have a weak economy with a very loose Fed than a strong economy with a tightening Fed.  And its the best to have a strengthening economy with a loose Fed (like now) at least until the bond market stops playing along.  

Last week, the bond market stopped ignoring the insanity of the government spending $2 trillion more every few months without any tax increases.  It started realizing the consequences of the lopsided supply/demand dynamic with a Fed keeping purchases the same as Biden goes on a spending spree.  Bond prices have to go down when there is more supply, inflation rising, and commodity prices making 2 year highs.  

What is interesting about the stock market is that its at such a high level compared to past bond market panics, that it is having a hard time shrugging off the selling in bonds.  The S&P 500 feels very weak, even when it made that big move higher on March 1.  It felt more like automatic first day of the month inflows pushing prices higher than where the natural buyers and sellers are at.  

A lot of picking the right direction for the market is based on that gut feel, the intuition gained from watching AND studying markets for several years.  And its still tough, because the market always provides the most liquidity for the wrong side of the trade.  Its always easier to get long weak markets and to get short strong markets.  Strong markets don't give longs much time to get in.  That's how November to February felt like.  Now its a different ball game.  It still doesn't feel like a weak market, but it does feel more balanced than the previous 4 months, when bulls were clearly the stronger side.  

One of the most important lessons that one can gain from these type of markets is that avoiding the big drawdowns and flush moves lower is the most important part of trading.  Its not about hitting home runs and offense.  A good defense goes a much longer way than a good offense.  Good defense with a mediocre offense will give you a chance to making a living at this game.  Good offense with a mediocre defense is asking for trouble and a blowup is just a matter of time.