Stimmy Spirits and Powell the Bartender

There are just some markets where you have to be either flat or be long.  Being short is just asking for trouble.  The SPX is one of those markets.  It doesn't meant that you can't make money shorting the SPX.  Its just the odds are not in your favor most of the time.  The odds are in your favor for shorting only a small percentage of the time, usually after a long period of losses for SPX short sellers.  

I do see a golden age for US index short selling coming in 2022 but we need to get past this stimulus fueled run which probably keeps the bull market intact until the fall. 

That exuberance is lacking in many of the retail favorites like TSLA and all the other EV, biotech, and bitcoin stocks.  It seems like all that extra supply from secondaries and new SPAC issuance has siphoned off a lot of the momentum money, overwhelming the demand.  TSLA and all the other momo names are still egregiously overvalued and are still disasters for long term investments, but they have come down quite a bit and could have a strong dead cat bounce at any moment.  

It is a bit like we've just passed the mid 1999 phase of the bubble, if we're going to use analogs.  That's when the Fed raised the Fed funds rate and bonds started trading much weaker.  That means there is probably another 6 to 9 months of upward trending move left for this bubble.  

This time, even with the Fed in full denial about future tightening, if things go as planned, expect Powell to start using more hawkish language as the reopening is going full blast, which is effectively like the first rate hike back in June 1999.  These days, the Fed is so slow to even talk about raising rates, that the mere talk about a potential taper is akin to the first rate hike in a tightening cycle back in the 1990s.  

Kid Gloves.   The Fed has kid gloves when it deals with the market.  It is the parent that spoils its child, conditioning it so that if it doesn't give the child ice cream or candy every few hours, it goes into a temper tantrum.  That child is the US stock market.  It owns vast real estate inside the heads of all the Fed governors.  

In these kind of animal spirits type of markets, when the head bartender, Powell, is providing nearly unlimited booze to the party animals, you get persistent bubble behavior.  Powell has been on the job at Bar Fed for the last 4 years, and he was scolded and hounded in year 2 for taking away the drinks and closing the bar down too early.  He learned his lesson from his boss, the SPX and the institutional Wall St. machine that whines and cries for easy money.   He's now on automatic pilot, the other way, providing free flowing spirits to the drunken sailors, loaded to the gills with stimmy cash.

Under these conditions, it makes it harder to use past history as a guide for future price movements.  There is still a lot of value in using historical data and statistics, but their usefulness is diminished when you get this kind of M2 money growth (unprecedented since World War 2) simultaneous to the biggest everything bubble we've ever seen.  

There is no doubt that some of money from the $1T and $1.9T Covid pork stimmy packages passed in December and March is getting pumped into US stocks.  Its hard to say how much, but I don't think its a coincidence that you are seeing monster fund inflows into equity mutual funds and ETFs this year.  

Over the next few months, most of the stimmy money will be deployed and that's probably when you get the blowoff top and exquisite short moment.  Obviously, I have underestimated the risk appetite for stocks of stimmy recipients, both institutional and retail.  And a LOT of this money spew is spilling into the hands of institutional investors, who are immediately going to work buying US stocks.  

You can't trade the market that you want, you have to trade the market that is.  As much as I hate to see the US government spew money everywhere, debasing the dollar  during the biggest bubble of our lifetimes, you can't deny its effects.  Shorting the SPX at this time is fighting against forces that are bigger than we've ever seen before.  This is no joke.  That is why you are seeing speculative garbage like NFTs and cryptos rocket higher.  But there is an end to the pork, as I mentioned in the last blog post.  You just have to respect the buying power of the bulls until most of this fuel is used up.  And that will probably take a few months.  

In the meantime, there will be short term spots to take tactical swing short positions, or longer term swing long positions, when one side gets too crowded, but nothing worthy of making a big bet.  The bigger and better opportunities will happen after the reopening and right before the Fed starts talking more hawkish.  Still a while away from that.

I am still expecting a sharp pullback soon, just because how overextended the SPX is above the 100 day and 200 day moving averages, and the exuberant atmosphere among index investors.