Sticky Bulls

That's what a 20% rally from the start of the year does to investor psychology.  Remember, most investors use the rear view mirror when they trade.  That 20% rally which was relentless with every small dip being voraciously bought left a searing memory into the psyche of most investors.  They now don't think the market can stay down, and that even big dips are not a sign of a change in the market, but just a buying opportunity, a bump in the road to higher prices.  The Twitter poll run by @hmeisler had a repeat from the week prior, with bulls much higher than bears.  

I was a bit shocked, just because last week, the SPX traded much lower and only was able to put in a last minute rally on Friday afternoon, which obviously got investors bullish.  It tells me that investors are still very quick to get bullish in this market.  

The equity volume on the exchanges was mediocre, and it didn't seem like too many were anxious to make trades yesterday.  It appears that the bulls are mostly satiated with their dip buys, not really willing to put more money in at this time, but not willing to cut losses on recent purchases.  Also, it doesn't seem like too many are worried during this selloff, you aren't seeing the elevated put volume that you normally see after 4 weeks of a down market.  That worries me a bit as a dip buyer, it doesn't change my view that there will be a strong rebound once the bottom is hit, but it does make me wary of more selling in the coming days as there seems to be limited stop loss selling or capitulation.  

The explosive move higher in crude oil despite stock market weakness is a definite burden for the bond market, and thus, a negative for stocks, by collateral damage.  Anything that reinforces the notion that inflation will be high for longer will hurt stocks.  Reinflation is no longer welcome.  

More and more, this market is reminding me of October 2014, when after over 3 years of a steady uptrend, you finally got investors into a very complacent mindset leading to a sharp drop and an equally sharp rebound, which presaged an extended topping phase in 2015. 

Treasuries continue to be a tough trade, with FOMC meeting in November and higher energy prices as negative factors.  I don't expect a 2018 style bond market rout mainly because I doubt that the Fed will be able to go on an extended hiking cycle with how fragile the stock market will be from 2022.  And let's not confuse the current Fed with those from anytime pre 2008, and even pre 2020.  Inflation is just not a big factor in their decision making, no matter how much everyone talks about it.  The Fed's priorities in order are:  1) Stock market 2) Employment 3) US growth 4) Bond market 5) Inflation  

And the Fed wants all of them higher, except inflation, but they are willing to tolerate high inflation, but not a weak stock market, labor market, or growth.  So higher energy prices will not be a factor in Fed policy.  Just like the Fed ignored higher energy prices when cutting rates in 2007 and 2008.  

Being patient on adding more equity exposure, I am underwater on last week's purchases so would like to see some more fear out there before I add more.  We've had a lot of gap up and fade moves and that speaks to investor optimism.  Usually when investors are pessimistic, you see many more gap downs.  A big gap down that scares the crowd would go a long way towards making a bottom.  Thought that would happen last Friday but they brought it all the way back up.