Dip Buying Getting Tougher

They don't give you many layups in the SPX these days.  If you don't have much time to buy the dip, then it's likely to rip.  If they give you a lot of time to buy the dip then it's likely to dip even more.  Dip buying SPX is profitable, and everyone is on to that game, so dips don't last for long, and you only get good prices when it looks the scariest, in the teeth of the uncertainty, ahead of a possible headline filled weekend, on a Friday.  

I was waiting with both hands to buy the panic selling on the Sunday night Globex open and everyone else had basically the same plan.  There aren't too many suckers selling in the hole in ES these days.  They've been fried over and over again for the past 18 months, and their capital has been shrunk to smurf sized levels.  On the other hand, the dip buyers keep making coin, building up their capital base, trading bigger, and a huge force in the market, causing big V bottom bounces as they buy with reckless abandon as soon as they sense that the bottom is in.  

Back in the old days, when you had a big down Friday with a weak close, you normally had panic hedge selling on Sunday night in the overnight futures as soon as Globex opened.  The fund managers that panic sell don't wait for Sunday night anymore, they do it on Friday at the close.  The markets are smarter than in the past, and you don't see easy trades on the buy side linger for long.  

At SPX 4580, the risk reward for a dip buy is very good.  Now with the futures showing SPX ~4635, the risk reward isn't that great anymore, and even though still likely to see higher before lower, the reward is smaller and there is more risk involved, as it can very easily get back down to 4580 within days.  

Oh, and that omicron variant, the headline of the day.  They sneakily skipped Xi and jumped to omicron.  The Xi variant sounds so much better than omicron.  WHO was looking out for you know who when they made that decision.  Anyway, the 5 minute virus experts are parading on Twitter with their quick takes, assuming that the omicron variant is mild and more transmissible, so supposedly better than Delta, leading to faster herd immunity, and "outcompeting" Delta.  This is based on hearsay from a couple of SA doctors who want to see omicron downplayed, so as to not make SA look so bad.  Its all speculation at this point, but the most likely scenario is that you get similar symptoms and severity as Delta, and vaccine evasion is probably slightly greater as the virus evolves to beat the current defenses out there.  Not much of a game changer, IMO.  Plus, I am sure they will start making annual changes to the Covid vaccines to boost sales and "efficacy".  

Hamfisted lockdowns are going to be fewer and farther between in the future, as the majority are sick and tired of being corralled like sheep and will voice their displeasure towards politicians, especially in places like the US, where you have a less "obedient" population.  Europe is in the middle of the obedience spectrum.  In Asia, they are on the other end of the spectrum and completely "obedient", and do what they are told, no questions asked.  So lockdowns in US are not going to happen, while they are very much possible in Asia and parts of Europe.  

Bottom line, for the stock market, its all about the Fed, and how hawkish they will be in the coming months.  Even though the Fed is always looking for excuses to delay tightening and to be dovish, this omicron variant isn't going to stop them from their hawkish turn unless you see global lockdowns (very unlikely).  In a counterintuitive way, all this fuss over omicron could give the Fed an excuse to be dovish again in December, leading to a face ripper year end rally.  That's not my base case, as Biden seems to actually be a bit concerned about inflation, and that concern should likely flow through to Powell and friends.  

I missed the dip buying chance on Friday, looking for a puke out in the Sunday overnight sesson.   Even though it looks like we'll rally till Wednesday, with beginning of the month inflows likely to boost the SPX, I won't chase this.  If it dips a bit at the open, I'll look to put on a moderate size long in SPX.  After a bounce this week, we should see renewed selling later in the week or next week to revisit 4580, and perhaps get down as low as 4550, the Sept. highs. 

Nu Sellers

The headlines are timely, aren't they?  Its almost as if the headlines were made to scare the public on the least liquid trading of the month, the day after Thanksgiving.  So much for that positive seasonality around Thanksgiving.  There are so many end of year rally bulls and seasonality "experts" who lose the forest for the trees.  

When you have so much complacency from truly excessive call buying, an overbought market that was 6 weeks from a V bottom, and in thin air above 4700, you are asking for trouble if you stay long.  Sure, you could get a nonstop grind higher like a December 2017 January 2018 move, but you can also get a move like today, an out of the blue massive gap down on a scary headline.  

Now I'm sure the bulls will say this is a black swan move, they couldn't predict that a new Covid variant would be coming and that the market would be going higher without the news.  If it wasn't the Nu variant, it would have been faster taper worries, or debt ceiling, or pre CPI jitters, etc.  Bad news comes around all the time.  Its just a matter if the market is looking for them and sell on it.  They usually don't.  This time, with the SPX in a vulnerable spot, they did.  

Its unfortunate that the headlines had to come out today, if it had just come out a day later, I would be loaded up on shorts and deep in the green.  I figured that they would keep the bears at bay on Black Friday, with the holiday cheer.  And would use that to my advantage to put on a big line of shorts.  Now what.  Its no man's land at 4620, not enough blood for me to buy the dip, but definitely not enough meat on the bone to try to chase it here with shorts and deal with a possible face ripper reversal (however unlikely I believe it to be).  So we wait, for that buy zone down towards 4560-4580, to BTFD.  Not rocket science, you have to stay out of the middle, and play at the top and bottom of the range, to minimize getting chopped up.  My paper napking charting below shows support just above the Sep. highs where dip buyers should come in to scoop up stocks on "sale".  

Looking at the Rear View = Big Problems

The gains have been massive in stocks, especially big tech, but even the crappy small caps that retail loves are still up big year over year, even if many are down quite a bit from their all time highs.  The same can be said for bitcoin, other cryptos, NFTs, commodities, real estate, etc.  Basically everything but bonds have skyrockted in 2021.  This leads to the temptation of looking in the rear view mirror, to extrapolate into the future.  But the environment is very different from the start of the year.  Instead of looking forward to a bunch of fiscal and monetary stimulus, the market is now looking at fiscal stimulus that is decelerating and will continue to do so for the next 3 years (Republicans winning 2022 midterm elections is basically a fait accompli), as well as a Fed that is on the verge of a hawkish pivot, as political pressure from high inflation eventually seeps into more hawkish rhetoric from Fed governors and eventually to Powell. 

Now that Powell has been renominated, he doesn't have to worry so much about placating Biden, and the financial markets.  He's totally sold out to Wall St., but he's also sold out to Capitol Hill and the White House, and inflation is the big worry now, not unemployment or economic growth.  

That being said, the window for Fed hiking is shrinking by the day.  You have to make the assumption that if the SPX is in steady downtrend, which I expect to start from the 2nd quarter of 2022, Powell won't start a hiking cycle, but will probably just do a token rate hike to try to maintain a tiny shred of credibility on inflation, and then pause as the US stock bubble pops and weakens the economy.  Powell in 2022 will be a lot like Yellen in 2015, but with inflation hot, not cold.  Yellen was expected to start a rate hiking cycle in the 2nd half of 2015 but she delayed due to the SPX waterfall decline in Aug/Sep 2015, and hiked once in Dec. 2015 and paused for a year before hiking again, only after the election and after the SPX was back to making new all time highs in late 2016.  

Unfortunately for stock market investors, I don't expect such a benign resolution for the SPX this time around.  Here are some reasons:

1) Bond yields are much lower this time around, providing less of that risk parity hedge for when stocks go down.  With the Fed very hesistant to go to NIRP, that will limit potential gains in bonds.

2) Less potent Fed due to high inflation.  Inflation is much higher from all that Fed money printing, gov't handouts, and pork stimulus.  Inflation is payback for printing all that money, and resulting distrust in the dollar as a store of value.  I know the USD is going up now, but that's because of overzealous hiking expectations and global fund flows to the US stock market bubble, not because of long term fundamentals.  Eventually, a massive dollar bear market like you saw from 2001 to 2008 is likely.  Higher inflation makes Fed easing counterproductive, as the Fed money printing will just go towards pumping up asset prices, which will result in higher food/energy prices and rents.

3) Bubble valuations and historically high household allocation to stocks vs bonds/cash.  Most investors are neck deep in US stocks, much more than they were in 2015 or even 2018.  So not that much dry powder left and lots of potential weak handed sellers when SPX enters a downtrend.  Don't forget that baby boomers are older now, they have a natural tendency to sell down stocks and buy bonds.   

4) Unlikely to see big fiscal stimulus like 2017 Trump tax cuts or 2020-2021 Covid gov't pork series.  With a Republican Congress from 2022-2024 and gridlock, expect fiscal impulse to be reduced significantly.  Since there is almost no organic growth in the US, corporate earnings will be flat to down and coming off of the highest valuations in US stock market history.  

5) Ebullient Wall Street sentiment towards stocks is similar to 1999, when stocks seemed invincible after a huge bull run.  It has managed to drag in the millenials, probably the dumbest generation of our times, who hated stocks from 2008 to 2016, and now love stocks since middle of 2020, especially egregiously valued meme stocks.  

So with the combination of bubble valuations, ebullient sentiment, fiscal drag from late 2022 to late 2024, and a Fed less able to go full bazooka stimulus (unless it starts buying stocks, another story for another day) due to inflationary pushback, you have a potent mix brewing for an impending bear market that lasts for years, not a couple of months.  2021 was the year to buy the dip.  2022 will be the year to sell the rips.  

SPX looks heavy the past few days, seems like Powell renomination relief rally that lasted a few hours was the top for this move.  Usually the day before and after Thanksgiving are bullish due to holiday cheer, but expect weakness starting from next week dragging out to probably the middle of December, with feared CPI on Dec. 10, and potential faster taper from a renominated and less nervous Powell on Dec. 15.  Also throw in the debt ceiling in the middle of all that to scare the chicken littles and you have a few negative catalysts lined up.  Getting tempted to put on shorts soon.  Feeling bearish.  Would like to see a one/two day rally towards 4700-4720 to lay out the short line. 

A Hawkish Pivot

At the November FOMC meeting, Powell was about as dovish as you could be for someone who was starting to normalize policy.  He's transformed from his straightforward tell it like it is style from 2017 and 2018, to word salad mealy mouth statements used to appease the financial markets, and thus receive praise.  I don't know if he's being honest (unlikely) and is completely incompetant, or is just being Machivellian (more likely), doing whatever it takes to please the markets, politicians, and get renominated and maintain his power.  Mainly telling bold faced lies about inflation.  

You can tell inflation is starting to get to Biden when he's begging OPEC to increase supply and keeps threatening SPR oil releases in coordination with other nations.  Biden's poll numbers are about as bad as the worst moments for Trump, and he never really had good approval ratings.  Its getting clearer and clearer that the general public is starting to feel the pinch from higher prices, especially those that don't own stocks.  And even as out of touch as Biden is about the public mood, this inflation is so over the top hot that its even getting his attention.  

And when inflation starts worrying the President, then it will start worrying the Fed.  Because the politicians are the ones that pick the Fed governors.  There is no such thing as Fed independence.  Politicians don't want to see inflation go any higher, and if they had to pick their poison of higher inflation / higher stocks or lower inflation/lower stocks, they would probably pick the latter now.  That's usually not the case, and that's why the Fed is usually dovish.  

The politicians and central bankers, the liars that they are, have already tried to talk it down, pass the buck, and blame the inflation on everyone but themselves and their inflationary policies.   But there is only so long that you say transitory inflation until even the dumbest of the Fed believers see through the BS and get sick of hearing it.  

The nonsense about supply chain problems due to Covid is repeated so often that everyone believes it as gospel, not be questioned.  They say inflation is due to lack of goods supply, lack of labor supply, not due to excessive demand from bazooka stimulus.  Since its a supply chain problem, they say, it can't be solved by fiscal or monetary policy.  No one questions the logic.  If it was a supply problem, how do you get so many earnings beats and so few misses?  Shouldn't the lack of supply limit consumption and cause revenues and thus earnings to go down?  How many revenue misses have you seen?  Shouldn't S&P 500 revenues be down if supply chain problems were so bad?  Shouldn't retail stocks be getting destroyed?  Why are revenues and earnings so strong?  

Anyway, back to the market.  Very resilient and hanging tough near all time highs, Covid "bad" news was good for about a few hours of overnight weakness on Friday, and then people realized that these "soft" lockdowns are good because it slows down monetary policy normalization, and keeps them dovish, while having almost no effect on the overall economy.  Russell 2000 has been a very noteable laggard, and that's not bearish.  Its only bearish if you get Russell 2000 weakness along with bond market weakness, and that's not happening yet.  With the year end bullish forces at work, as long as 10 year stays under 1.70%, you are going to have to either have a serious flattening of the curve from a Fed hawkish pivot or a black swan to take this sucker down for more than just a retest of the early Sep. highs at SPX 4550 for the remainder of the year.  Betting on anything more than a quick 100 point pullback with shorts is getting greedy and begging to miss the exit point and get caught in a meat grinder higher till year end. 

That doesn't make me bullish, I do expect a sharp pullback of 100-150 points sometime in the next 3 weeks, with call activity over the top and complacency everywhere, and with bullish sentiment seeming to wane a bit from very bullish levels, which is actually not good for short term returns.  Still, I would rather be reactionary and be a buyer of the dip rather than try to predict when this solid uptrend turns and gives you a good short trade.  But it is getting tempting to try on a short for a quick gain sometime later this week, as we're approaching a window from post Thanksgiving to the 2nd week of December where seasonality is neutral. 

M2 is the Force

The most important variable for asset markets is the supply of money.  Monetary policy is important, but its fiscal policy which can really ignite M2 supply growth.  We had QE1, QE2, and QE3 that were nearly the same pace as that of the past 12 months, but the money supply didn't grow much because of fiscal tightness brought on by the combination of a Democrat president and Republican Congress from 2010 to 2016.  Also, politicians actually thought about the deficit back then, unlike now when deficits don't matter.

Take a look at the M2 supply growth for the US, Euro Area, Japan, and China for the past 5 years.  The US sticks out like a sore thumb.  The firehose of free money was unprecedented and the pace is still double what you are seeing in Europe and Japan, and pre-2020 US.  

Here is China vs US M2 supply for past 10 years:

China, which is notorious for printing huge amounts of money to paper over debt problems, has printed at a much slower rate than the US over the past 10 years, and especially since 2020.  Usually emerging markets are supposed to print a lot of money because there economies are growing faster, and the demand for money is greater.  But its the other way around, with the US going into bazooka mode and staying there.  And most of that money is not going to productive use or investment.  Its just a money spew, which ends up being recycled into the stock market, cryptos, real estate, etc.

It used to be China that had an inflation problem, now its the US.  Its not rocket science.  The more money in circulation, without a concurrent increase in production, increases prices.  All these 5 minute macro takes about Covid and supply chain problems leading to high inflation ignore the most important factor.  The massive increase in M2.  Like a knucklehead, I ignored this for most of the past 18 months.  But there is a reason that the SPX, bitcoin, commodities, etc. keep going up.  The rate of M2 growth is much faster than new equity/crypto/commodity supply growth.   As long as the M2 is growing at these rates (still 12%/year in the US), all dips in stocks will be buyable, and its going to hard to make money on long term short positions.

With the Covid stimulus mostly wearing off and the Fed reducing the pace of QE, the M2 supply growth should slow down considerably in 2022.  And with the horrible poll numbers for Biden, even with SPX at all time highs, the Dems look like they are doomed in November 2022 midterm elections.  That assures gridlock in Washington for 2023 and 2024, which is like an eternity for the stock market.  A Fed that is going to end QE and start hiking in summer/fall of 2022, with fiscal stimulus expected to be shut off for the next 2 years will definitely have a big impact on the money supply growth rate.  I expect M2 growth to go back down to 5-6% by the end of next year.  At that pace, the SPX becomes vulnerable to quick drops and waterfall declines, like 2011, 2015, 2018. 

SPX is back to being a boring market, as we've found a stabilizing level around 4700, where supply and demand seem fairly balanced.  I see no edge for either side here, but would take the other side on a 2-3% move.  Especially on the long side.  Buying dips is a much more effective strategy than selling rips.  With the market up huge this year, and the combined effect of portfolio window dressing and reluctance to sell at year end due to realizing capital gains 1 year earlier, the wind is at the bull's back.  

The bond market seems to have found a support level around 1.65-1.70% 10 year yield.  But the sentiment on bonds is poor, and there just isn't the demand to push it to much lower yields.  On the other side, speculative positioning is somewhat short, which means there isn't much weak handed money in bonds to push the yields much higher than 1.70%.  We're probably in a 1.40%-1.70% range for the next few months in 10 year yields.  Unless you get the unlikely event of the Fed speeding up the taper and pulling rate hikes forward, I see almost no chance of 10 yr going above 1.70%.  

Learning from Mistakes

2021 was a golden opportunity to be long US stocks for anyone who had a solid big picture view of how a bubble plays out.  Going into 2021, I was too enamored with not being caught long at the top of a massive bubble instead of recognizing that less than 1 year removed from the Covid "bear" market, it was highly unlikely a meaningful top would be made so quickly after such a huge flush out.  Even if you had a repeat of the brief Dec. 2018 to Feb. 2020 bottom to top cycle, that still gave you 14 months from the March 2020 lows, or until May 2021. 

The biggest clue that this bubble would be extended was how the Fed reacted to the growing bubble in 2021.  Powell remaining over the top dovish as the stock market kept going higher and higher and the economy was heating up was the most obvious sign that the bubble would get a lot bigger in 2021.  

February 2020 was the only meaningful top that was made while the Fed was not in a tightening mode, and it probably wouldn't have happened if not for a black swan event.  The only other instance of a big stock market drop without a tightening central bank was in the summer of 2011, when it was the tightening of the European financial system as sovereign yields for the PIIGS skyrocketed, a market driven tightening, not a central bank policy driven one.  A tightening nonetheless, the most important ingredient to form a meaningful stock market top. 

In hindsight, everything looks clear and obvious.  In the heat of the moment, in the middle of the battle, its never that easy.  Its much easier to make the right decisions as a Monday morning quarterback than trying to make the right reads while 300 pound linemen are trying to pummel you into the ground.   

The market was there offering loads of money and I was content with being short term focused and conservative, taking 5 dollar bills when I should have been collecting 100 dollar bills.  Finally in September/October, there was another golden opportunity, even though at the time, there was a lot of chop that made it "feel" scary to get long.  The disgust from my previous poor exits was enough motivation to make the right play.  The key was not getting in too early in buying the dip, which allowed me to hang on and not getting shaken out in late Sep./early Oct. as the market chopped violently from SPX 4300 to 4400.  

The first thing on my mind was to not sell if the trade went in my favor.  On my mind was those previous well-timed dip buys that didn't amount to much because I sold way too early, afraid of giving it back on another pullback.  This time, I gave the long trade plenty of time to work.  Even then, I sold a portion way too early, but thankfully, rode most of it to the 4650-4700 range.  The key was resisting the urge to microtrade, the bane of my existence, even as I thought that a quick 1 day pullback was imminent (it didn't happen until October 27).  Losing the arrogance of thinking that I was smart enough to time and predict every little move made me do nothing but just stay in the trade and let it play out.   

To this day, even after seeing the SPX go way higher after I sell so many times in my career, I still get that urge to sell after that quick profit on the initial portion of the V bounce.  It has to be the psychological crutch of aiming for steady, consistent moderate gains, instead of less common, but much bigger gains.  Even as I thought that I got rid of the salaryman mentality a long time ago, there is a seed deep inside my psyche that still wants to make consistent gains on my terms, instead of taking what the market gives me, whether it be big or small, plus or minus.  

There are zen like aspects to surfing the markets, if you try to force your will and style on the market, you limit yourself and close off the enormous potential that is out there.  Its like taking a boat out only to stay near the shore, content with catching little fish in quick daily trips, instead of going out into deep waters, looking for the big fish, going for the big catch in long multiday trips.  

I am all out of my SPX longs.  I could probably eek out a few more points but I just see too much call buying and complacency, as well as the upcoming options expiration and ensuing post-opex risk.  Also, the time window from the early October lows has played out, as we are 5 weeks from the blastoff point, and 6 weeks from the lows of early October.  Also the renewed weakness in Treasuries is another headwind.  Its a seasonally strong period, so not really interested in going short, but the risk/reward seems neutral to slightly favoring shorts.

Crypto Creep

Like mission creep, similar things happen in the investment world, where initially a product is thought of as one thing, but then as the price advances, new things are attributed to the product, giving it 'superpowers'.  Cryptocurrencies are a perfect example of a new investment, hard to value, with questionable fundamentals, that is initially treated like complete speculation, like Beanie Babies, like tulips, but as it goes higher and higher, and the uptrend shows more staying power, you get more and more believers.  

1) In the beginning, its the geeks and the paranoid idealists who view cryptos as an alternative currency that takes power away from governments and decouples money from the State.

2) Then you had the 15 minute macro experts who suddenly thinks blockchain is the next big technology and therefore makes bitcoin a good investment. The logic isn't questioned, its just repeated.

3) Next, you had the first big wave of speculators who see bitcoin going up, see others investing in it, and start piling in (2017-2018).  Its still considered a fringe asset among institutions, and not something that most consider as part of a balanced portfolio. 

4) After the Fed and US government goes bonkers and floods liquidity everywhere in 2020, speculation catches fire.  Suddenly, the markets go from fear of deflation, to fear of excessive money printing which gives bitcoin the digital gold label.  It is now considered an inflation hedge, a hedge against the devaluation of the dollar.  

5) Bitcoin goes parabolic and assorted coins trading for sub pennies are heavily pumped and start going up huge, and pump and dump scams show up.  Crypto mania is everywhere, hedge funds and institutions are getting involved, an ETF is made, with more in the works.  Shells of deadbeat small cap companies change their business to crypto mining, "defi", NFTs, or another crypto related buzzword that's hot among lotto retail speculators.  

Cryptocurrencies are the perfect asset class for those looking for juice and to get rich quick.  They can rationalize their investments with simple Fed brrr memes and by believing that institutions will begin to add them into their portfolios.  The most important aspect is the juice.  If bitcoin didn't have explosive price moves, the retail speculators wouldn't be playing it.  When you don't have a lot of money, 10% a year in stocks just won't make you rich.  

It is the mentality of the times.  That's why you are seeing such explosive growth in call option volumes since the summer of 2020.  And most of the volume isn't even in the monthly options, they are crowding into the weeklies, the ones with the most gamma/$ premium.  The riskiest and cheapest options that decay the fastest but provide the most bang for the buck.  Its a full blown lotto mentality in the financial markets.  

It would be nice if these bouts of mass speculation in high beta names and call options were a precise timing tool, but unfortunately, they are a better tool for timing tops in those names than in the broader market.  What is happening is probably the last speculative wave of this bubble that precedes the final top in the SPX, with a lead of 3 to 6 months. 

One thing to watch is the rates market.  5 year yields are trading at another 52 week high, and the market is back to pricing in more than 2 rate hikes in 2022.  The hot CPI number wasn't shrugged off by the bond market this time, like it has been so many times this year.  Part of that is because 10 yr yields went down to the 1.40-1.42% support area, the day before the CPI, and also the terrible 30 year auction afterwards.  But an additional factor which is being underestimated is the sudden concern about inflation from Biden.  And Manchin.  Politicians are getting more concerned about inflation and less about employment.  Political winds are shifting, and they will affect Fed actions in 2022.  

I thought that the Fed would be slow to act to hike in 2022, but I am beginning to change that view, based on the politics.  Its a midterm year, and while a lot of people love it when asset prices keep going up, there are more people who don't like to see gas, food, and rent going up.  If commodity prices keep surging higher in 2022, like I expect, that's going to put Powell (probably renominated soon) under more pressure to raise rates.  Still don't expect him to speed up the taper or hike until after tapering is over (June), but he's probably hiking at the very next meeting in July.  It doesn't matter if Powell hikes in July or September, because in either case, I don't see him hiking in early November, a few days ahead of the midterm election.  Not necessarily because of the politics behind it, but because the market will probably have a steep drop before that meeting.  So the most likely scenario is a July or Sep. hike, pause and then second hike in Dec., as long as you haven't entered a bear market by then, which is a possibility.  Its either lights out after the first hike or after the second one, in my view.  I don't see this level of optimism, the super bubble valuations, the extreme overweight in US stocks among investors to be able to continue more than a year from now.

I have sold most of my SPX long, still have a some left that I wasn't able to get out of at good levels so I am holding and looking to dump next week on a bounce.  The first 2% dip after such a strong run is usually bought, and the recent highs are often retested.  It looks like the first dip is over, and likely to see a reflexive bounce and another call buying frenzy early next week as we go back towards all time highs.  The times to fear a big parabolic rise is after months of a rising market, which isn't the case now.  That September/October correction purged the positioning enough that this market probably won't crash back down after a big advance like a January 2018 or even a September 2020. 

Another Call Option Wave

Stocks aren't giving the speculators enough juice.  They are reaching for lotto tickets in the form of call options. This is late cycle behavior, ala 1999, 2000.  That being said, unlike 1999 and 2000, the Fed is still adding liquidity into this party, not taking it away.  A big difference, and the main reason the top will be more extended than back then.

The volumes are well above average, and put/call ratios are well below average.  The only exception is TSLA, which for some reason, has fairly high put/call ratios for such a favored speculative stock.  The two that stick out above are AMD and F, which traded more options than both AAPL and TSLA. F seems to be catching the electric vehicle frenzy, and AMD has become a WSB favorite lately, as seen by message activity tracked by stockquant. 

AMD, TSLA, LCID, AMC, and NVDA are WSB stocks.  That's 5 of the top 10 options volume leaders for Monday driven by the Robinhood crowd.  Retail has been piling into their favorite stocks since the beginning of month. This is not necessarily a sell signal for the SPX, but its a long term sell signal for WSB stocks.  After the last time you had a retail trader frenzy in call options, you immediately saw those stocks top out, but the SPX just kept going higher.  Obviously, there is a huge difference between SPX at 3900 and SPX at 4700, and you can't extract too much info from a sample size of 1.  But with put/call ratios this low and volumes so high, the market usually has a difficult time squeezing even higher and usually chops and consolidates its gains for a few weeks.  That also matches with the typical pattern of break outs to a new all time high after a deep and extended pullback retesting the breakout point (SPX 4550) within 1 to 2 months.  

But with Powell regaining control of the bond market and repricing hiking odds for 2022 and 2023, the can has been kicked a little bit further down the road, giving investors more room to drive up stocks to even more insane levels after this speculative fervor cools down.  Powell is intent on not repeating the 2018 tantrum, taking a painfully slow turn for monetary policy, nurturing this bubble even more.  He's still not caving to the media pressure to take inflation more seriously and do quicker rate hikes.  His dovish backbone is like a ramrod, its not bending to the pressure put on by inflation hawks which are growing substantially in number.

His press conferences are basically Lagarde Light.  Full of nonsensical gibberish, cringeworthy rationalizations for reckless monetary policy.  And Wall Street loves him for it.  He's figured out the game and its not that complicated.  Be dovish when it matters.  The default setting is dovish.  Be hawkish every now and then when no important decisions are imminent so as to look "balanced".  Watch the stock market go up and be treated like a maestro and a great "manager" of the economy.  Much like how Greenspan was treated from 1987 to 2000.  

Tapering QE is not going to pop this bubble.  It has to be rate hikes, and the threat of more rate hikes that does it.  That gives this market at least another 6 months of runway, not necessarily to keep going up, but not to enter a downtrend.  It could go up or sideways till QE is finished, but I see almost no way SPX goes into a noticeable downtrend without a significant repricing of the yield curve to reflect a more hawkish Fed and more persistent inflation (8+ rate hikes priced in by 2024, 2% 10 year yields.).  It could happen, but I doubt it.  It would be betting on a massive underdog without getting good odds. 

Big picture, long term, we are getting more confirmation that this bubble is sucking in a lot of souls, and the payback will be immense (if the Fed doesn't come in with guns blazing with another bazooka QE to rescue it) on the other side.  When this bubble does pop, it will be a good thing for society.  A society built on speculation and perpetual bailouts and money spews is one that rots the system from the inside.  The side effects is a labor shortage because people are unwilling or don't need to work, instead speculating and living off their gains in meme stocks, call options, cryptos, etc.  It breeds more dependency on government handouts, when the bubble pops and the economy weakens.  It makes people lazy. 

I sold some of my SPX position yesterday, and will sell more this week and eventually look to sell it all by early next week.  It is still too early to make a high conviction bet on the short side, even though I expect a pullback after November 19.  Even at these overbought levels, the odds are still not good enough for shorts.  Its just not a good time of the year to make bearish bets, when fund managers are chasing performance and long term investors are loathe to take profits before year end and bring forward capital gains by 1 year. 

Dove Eyes

The wall of worry is crumbling.  One of those worries, the Fed taper and a hawkish Powell has come and gone with Powell going back to his mealy mouth dovish ways.  It was a bunch of incongruent spew of excuses for a turtle tightening.  Like watching paint dry.  Inflation could come in hot for years and Powell would still be stumbling for anything to justify keeping ZIRP and the stock market pumping higher.   After that plunge in December 2018 when Powell was on automatic pilot towards normalization, he's a changed man.  Once bitten, twice shy.   He got abused by Trump and it shook him hard.  He's not going to risk upsetting the stock market anymore.  And a rising market increases his popularity and his likelihood of getting reappointed not only this year, but 4 years from now, and on and on.  

Contrary to the September FOMC meeting, Powell bent over backwards to try to lower short term yields, blaming inflation all on the supply chain, non-Fed controlled issues, so that he escapes any blame for changing inflation expectations among the public.  It is clear that Powell will not surprise on the hawkish side.  And he will only meet the market's tightening expectations on his terms, when its excruciatingly obviously telegraphed, so as to not surprise the market.  The post Dec. 2018 Powell now treats markets with kid gloves, pampering this baby of a market that cries for dovish words at any sign of stock market weakness.  

You have a dovish Powell reassuring this bubble market, and speculative fervor overflowing, as shown by a Russell 2000 that is breaking out and vastly outperforming the SPX in November.  We are possibly entering a nonstop rally phase, similar to an October 2017-January 2018 / October 2019-January 2020 period, when there was almost no pullbacks and markets grinded higher almost everyday.   The rally has been impressive, hardly even pausing ahead of the FOMC taper announcement.  The demand for equities is overflowing at the moment and these kind of strong momentum moves usually lead to good 1-2 month returns.  But, with the market now 150 SPX points above the September highs, and the market up 25% with 2 months to go, it would be natural for there to be some consolidation up here, perhaps between 4650 to 4750.  

The edge on the long side is diminishing but still too early to short.  Still holding the long SPX position but will probably sell most of it by early next week.  November 10 will be 4 weeks from the October 13 blastoff date which ignited this 350+ point rally.  So, getting closer to the point when the rally phase starts getting choppy and becoming more vulnerable to a 1-3% pullback.  

Treasuries finding a bottom and refusing to selloff much on the strong nonfarm payrolls number is another positive sign for stocks.  Only a few weeks ago, investors were worried about bond yields and it was one of the excuses to sell stocks.  Looks like 1.70% 10 year yields will be hard to blast through, especially with a turtle tapering Fed. 

Long with an Eye on the Exit

We have quickly transitioned from fear to greed in October, faster than in earlier stages of this bull market, like 2012, 2013, 2014.  It seems investors have been well conditioned to just keep buying once there is a confirmation of a bottom, and buy quickly.  The longer you wait to buy after these V and U bottoms, the worse the entries are. 

It felt a bit easier to get long into the hole in early October than it has been to stay long the last few days as I see the rampant speculation in TSLA, cryptos, and assorted small cap flotsam that retail gets excited about.  But I've resisted the temptation to take profits and stayed with the plan.  The bigger picture of investors having de-risked for much of September and half of October, gives room for the market to run for a bit more time.  Even though speculative names are on fire, its only been burning for about 10 days, so I would give it another 2-3 weeks before the fire burns itself out naturally.  

These fear greed cycles have a natural duration to them, with the swing cycles from local high to low to high.  Usually after an extended pullback, in a strong bull market, the swing cycles from low to high last from around 4 to 8 weeks.  If you mark October 13 as the blastoff point of this rally, we're 3 weeks into the up cycle, giving it a minimum of 1 more week up, but possibly another month higher of grinding up action. 

FOMC meeting is today and I am bit surprised at how strong this market is going into the meeting, with everyone expecting the "negative catalyst" taper announcement to happen.  I thought pre FOMC hedging would provide a buyable dip to get long more into the FOMC meeting.  But perhaps the FOMC hedging already happened last week ahead of tech earnings and after the bad earnings reports from AAPL and AMZN.  Its very possible that the buying pressure is so strong that hedging had a negligle downward effect on prices.  Given the continued steady flow into index and ETF puts, it seems like index hedging has been overwhelmed by heavy equity inflows in recent days.

Its clear that there is a lot of FOMO money looking to get long more US stocks, even as overseas stocks lag and you see signs of economic slowdown in the leading indicators along with high, sticky inflation.  The put/call ratios are very low, and most people are expecting a rally into year end.  A lot of that seasonality based anticipatory buying is happening, and I expect even more after the Fed taper "uncertainty" is cleared up after today's meeting.  

Don't have a strong view on how Powell will come out, thought he would lean dovish all year until he got reappointed but it seems like all the inflation talk has put pressure on him to be more hawkish, and not be so blatant with the lie about transitory inflation.  But at this point, whatever comes out of the Fed meeting, you'll probably see the money continue to flow into US stocks (equity inflows + stock buybacks), and that's probably going to keep a bid in the market until we reach the saturation point.  I'm guessing that saturation point will come around November monthly opex, on Nov. 19.  Staying long SPX till we get closer to that date, and then exit hopefully at higher levels and wait for the next play.