The Coming Bull Trap

Here is the baseline view that biases the market projection for the next few months:  

1. Post bubble environment where households overweight in equities start to sell amid the continued downward pressure on stocks as the fundamentals don't support current equity valuations.  A re-valuation to more normal valuations. 

2. Fed will continue to tighten, longer than stock investors want, with their inflation credibility on the line, they will be reluctant to pivot until they see more overt signs of recession.  Too many are anticipating a dovish pivot before the Fed even gets to restrictive rate levels, at 3+% Fed funds. 

3. Lack of organic growth means without a constant flow of fiscal and monetary stimulus + wealth effect, economic growth will be very low.  Working age population growth rate among developed nations is near 0.  Productivity isn't increasing due to lack breakthrough technologies over the last 20 years.  The last major productivity boost was the internet.  Smart phones and electric cars don't boost productivity.  Nominal GDP growth in the future will be all inflation, no productivity growth.  This will show up in earnings over the next few quarters.  Corporations will have to reduce guidance as forward earnings estimates are too high.  Stocks will get re-rated lower from the bottom up, with big cap tech feeling the most heat.  

I find it interesting that the bull's top 2 reasons for buying stocks is 1. potential Powell pivot as inflation goes lower and growth slows down 2. bearish sentiment.  The first reason would most likely happen in a risk-off environment where equities will be the worst performing asset class.  So in order to get 1., stock have to go down first!  The second reason, bearish sentiment, assumes that survey participants being bearish, have been actively selling stocks and hold lots of cash and underweight stocks.  But the equity funds flow data for 2022 show people buying the dip while they respond as being bearish in the surveys.  

This is not like 2007-2008.  This is like 2000-2001.  There wasn't much excitement for US stocks at the peak in 2007.  The excitement was in real estate.  In 2020-2021, the excitement was in US stocks, the most since 2000.  We are in the aftermath of a massive speculative bubble that's the biggest in US history.  Even in 2000, there were hated sectors of the equity market, but at the peak in 2021, almost everything was loved, even bonds, as 10 year yields were trading 1.1% at the start of 2021.  

For bears that have been waiting for the exquisite moment to get short, I think its coming in the middle of July, after you get the CPI numbers come out and you see more investors buzzing about inflation peaking, and they will try to front run a Fed pivot.  The bulls will be way too early.  

We've been ripping higher since triple witching, the oversold levels gave the bulls the slingshot move higher.  I've noticed quite a change among the CNBC Fast Money crew, they are much more optimistic now, and I'm hearing targets like 4100 SPX and even higher.  The bulls main argument mostly seem based on technical analysis, while the bears main argument is mainly based on fundamental analysis.  

I don't expect commodity prices to go down much in a recession, contrary to what many think.  There just isn't enough of a supply response and energy demand destruction from a recession is overrated.  Emerging markets continue to be more and more energy hungry as they develop.  

Not much to do in SPX  here, giving the bulls some room to roam and take this market higher.  I expect the rally this time around to last longer than the one in late May that took SPX up over a week, and then went sideways a few days and immediately plunged.