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.