Its a Bear

The bull is dead.  Its over.  Its a bear market.  We haven't seen a bear market since 2008.  Investors are not ready for it.  I wasn't ready for it to happen so quickly.  After 14 years, memories of 2008, and 2000, have faded.  After losing money trying to buy the dip a few times since the start of the year, its getting more and more apparent that we aren't turning back.  No more multi-month continuous rallies that go to new all time highs.  No more V bottoms that don't give you much time to buy the lows.  Now you will see messy bottoms that only lead to short term rallies that are a few weeks, not months.  

The topping phase and the transition from bull to bear has been shorter than I expected.  I see no way this market goes back to SPX 4700 this year, and probably the next rally off this oversold market, will likely only take it up to 4500-4550, at the maximum.  The stock market is smarter than back in 2007, and 2000.  The markets now realize how important monetary policy is to stocks, unlike back in 2000 or 2007.  Its almost gotten to the point where basic macroeconomic fundamentals don't really matter to investors, its just monetary policy. 

In order to fuel a stock market that is fundamentally overvalued, new equity inflows have to come in and/or corporate stock buybacks.  After the heavy equity inflows since the November 2020 election, you have a heavily invested community that has just started turning tail, and it would not surprise me if these equity outflows turn into bond inflows, which has turned negative.  Ever since 2008, these kind of heavy outflows have proven to be near intermediate term peaks in the 10 year yield. 

Equity Fund Flows (Jan. 2020 to Apr. 2022)

Bond Fund Flows (Dec. 2021 to Apr. 2022)

At this point, you have a huge investor base, broadened considerably post 2020 with the retail frenzy into speculative names, all underwater and bleeding, with a hawkish Fed and reduced liquidity going into an economy that is slowing.  A bad mix would be an understatement. 

For this bear market:

The match:  Fed liquidity from +$120B and ZIRP to -$95B and 2.00+% Fed funds rate.

The fuel:  High valuations.  

The only thing that the bulls have going for them is the negative sentiment, but sentiment doesn't change a trend.  If investors aren't willing to get bullish, negative sentiment will stay negative, or just get less negative.  And given how much the financial markets these days are obsessed with the Fed, I don't see how you get that big bullish turn in sentiment that would drive stock prices higher unless you get Powell throwing in the towel on tightening.  I don't see that happening until at least another 125-150 bps of hikes being done.  That takes you to possibly at the earliest, the September FOMC meeting where they signal a pause or less hawkish rhetoric.  

So from that standpoint, I don't see a bullish catalyst that lasts until you get the Fed throwing in the towel on their inflation "fight", and go back to what they are comfortable doing, pumping more liquidity into the system and backstopping the stock market.  But the problem is that I don't see inflation, at least commodity/food inflation coming down.  I believe we're in the middle of a strong secular bull market in commodities due to the lack of investment over the years in new oil/gas production and nuclear energy, as well as the rush to invest in low ROI energy sources such as solar and wind.  That's causing a shortage of energy, that either needs to be resolved through demand destruction through higher prices or additional production, which will take a few years to come online, because these things don't turn on a dime. 

For the first time in 13 years, it will be safer and much more profitable to short rallies than to buy dips.  I don't say that lightly, because the buy the dip strategy has been a huge winner over the years.  

It looks like the bond market has finally reached a point where buyers are willing to step in and take a stand, which is at 3.00% 10 year yields.  There is still time to enter bonds at good levels, so I don't see a need to rush in here.  I don't see much upside or downside for bonds as I expect it to be slowly forming a bottom in the next 2 months, before you get that trend change which will spawn a new bull market for bonds.  But I don't expect it to be as strong as the bond bull markets from 2008-2009, and 2011-2012, 2014-2016, and 2019-2020.  Those bull markets were fed by a steady downtrend in commodity prices, Chinese offshoring led deflation, and less expansionary fiscal policy.  

Now we've entered a strong bull market regime for commodities, and the low hanging fruit of Chinese export led deflation is gone.  Plus, you're seeing in the US, and even some in Europe, more of a willingness to hand out stimmy checks and deficit spend their way to short term prosperity.  That's inflationary, so bonds will not have the same type of crazy moves lower in yields as you've seen in the past 13 years.  With that said, I don't expect a secular bear market in bonds, but more of a range bound market for several years that probably trades between 1 to 3% 10 year yields depending on what the Fed is doing at that particular moment in time.  

Into the weakness this week, I have stayed away from the temptation to buy SPX and have focused on buying some of the strongest stocks in the strongest sector, energy.  I expect energy to be the best hiding place for stocks over the next 2-3 months.  And after that, I don't think it will be safe to hold anything, as I expect stock investors to become more and more indiscriminate and urgent in their selling, as it becomes obvious that we're in a bear market.  

I am still long a small SPX long position, its small enough where I can weather the storm and not worry, but I will be selling it on any trip back towards the 4400-4500 resistance zone.  With a much feared FOMC meeting next week, and with big tech earnings out of the way after this week, given this oversold nature of the market, I expect a strong rebound for stocks in May, maybe the last golden exit opportunity for bagholders like me to dump their stocks and either buy bonds or put on a short position.