Words and Actions Diverge

Fads and manias come and go, but in the end, the fundamentals eventually determine price.  Its tempting to see stocks down 30-50% and think you are getting a bargain, a half off sale, without looking at the fundamentals.  When you had people losing their minds, willing to pay up for flavors of the day, regardless of valuations, you get charts that look like this:

 

 

There are many that get caught up in trying to buy a dip, confusing the tendency for the stock indices to mean revert, and extrapolating that to individual stocks and ETFs.  The temptation of buying something at much cheaper prices than where it was trading a few weeks ago.  In actuality, individual stocks tend to trend for long periods of time, both up and down.  As the posterboy for this bubble, ARKK has managed to attract $1.4B in fund inflows YTD despite going from 97 to 45 in less than 5 months.  And the 3x Nasdaq 100 ETF, TQQQ, has managed to attract $8.3B in flows YTD while it went from 85 to 33.  The most popular sector since 2020, tech stocks, is still attracting huge inflows in their most speculative ETF.  

This is where words don't equal actions.  In all these sentiment surveys that show lots of bears, you never see what these survey respondents are actually doing with their money.  The actions of the public still show that there are many buying the dip and taking bullish actions. 

 

Now let's take a look at what people think are crowded trades, because prices are going up, where supposedly everyone is bullish: the energy sector.  

 

 

Since these ETFs are going up, the assumption is that investors are taking bullish actions.  But since the start of 2021 to now, a period when oil went from $48 to $115, and XOP went from $58 to $157, there have been net fund outflows.  The opposite of what's happened with ARKK and TQQQ. 

Being contrarian doesn't mean fighting the trend.  And talking bullish and acting bullish are two different things.  

We have gotten a huge squeeze higher in the SPX over the past 3 days, catching me by surprise.  It is setting up for a good risk/reward scenario on the short side in the coming weeks.  I though NDX 12600-12800 would be a good short level, but considering how quickly it got up to that level, I will give it a few more days to see how far the bulls are willing to bid up the tech stocks, which is where I want to be on the short side.  

 

Perhaps we'll get investors all bulled up about a possible Fed September pause after the nonfarm payrolls disappoints (June 3) and CPI inflation starts trending lower (June 10).  Both of those are likely to happen, as employment slows down and the government starts to actively manipulate CPI lower ahead of the midterm elections.  But I expect Powell to stick with the hawkish talk at the June FOMC meeting (June 15) for now as the SPX has recovered sharply off the lows and food/energy prices keep going higher.  So possible strength up to June 15 (probably tops out before that, but open to a longer bear bounce), and then a resumption of the downtrend and new lows, breaking SPX 3800 later this summer.