A Bond Led Rally

Has patterns in the stock market forever changed and its just all about monetary policy, and earnings / economic cycles are considered meaningless?  Sometimes it feels that way.  

Really, the only meaningful selloff you've had that's lasted more than 3 months since 2009 was due to the Fed raising rates more quickly than expected along with bonds selling off rapidly.  Earnings were just fine in the first 6 months of the year and PMIs were well above 50.  Yet stocks got destroyed.  Now that there are clear signs that the economy is slowing, bonds are rallying hard along with stocks, which are reacting to the lower bond yields by ripping higher.  

Its almost as if all that matters is bond yields, and by extension, monetary policy.  Its unprecedented how singularly focused the stock market is on the Fed.  Earnings don't seem to matter.  The economy only seems to matter when it has an effect on bond yields, so the worse, the better.  Bad news is still good news after 13 years!  Yet it still surprises people when stocks rip on bad economic data.  Have they lived in a cave for the last 13 years?  Do they have such thick skulls that they can't absorb new patterns, even when its been reinforced for 13 years?  Yes, I know it feels unnatural for stocks to go up when data shows that the economy is weakening, but that's usually what happens.  Why do people keep fighting it?  

If the valuations weren't so high and the bubble so big in 2021, I would join the bull camp and buy dips and play for short term rallies.  But its hard to overcome my bias and experience of seeing post bubble markets go down for years with only short term rallies that always fade.  And 2021 was probably the biggest bubble ever in US stock market history.   US stocks are still historically expensive with a long term growth picture that doesn't look bright.  And US stocks are still considered the best long term investment by most investors, even those outside of the US.  

But with 10 year yields now only slightly higher than the Fed funds rate, with a likely 50 bps in September which will make short term rates higher than 10 year rates, its asking a lot for bonds to keep rallying without either 1) economic data completely falling apart or 2) a dovish pivot.  You just can't have the bond market keep rallying as stocks rally without a dovish pivot.  A hope for a pivot isn't enough.  It has to be expected within months, and with authority, like in January 2019, not a mealy mouth neutral stance.  

So my assumption is that a bond led rally without a Fed pivot is nearing its end, maybe it has one last burst higher on a lower CPI that proves inflation peaked, but I would use that as an opportunity to short any euphoria/relief rally that comes with it.  

I am focused on futures and options data lately, as I want to see positioning get more neutral before I short, and according to the COT data as of 7/26/22 (before the huge Fed and post Fed rally), the speculators just got even shorter S&P 500 futures.  Its getting to really big amounts here, something that can't be ignored.  Yes, the data is a bit outdated because I am sure speculator positions are much less short now, after that huge rally (much of it was probably short covering), but its still not a good sign for those who are short here. 

Options data showed a divergence between index options and single name equity options activity.  In index options, especially SPX, you saw a huge amount of call selling and put buying (about $16B notional on Friday), and SPY was also a big negative delta number.  Counteracting that, there was heavy call buying in TSLA, AAPL, and AMZN, so speculators are chasing tech names here.  

Would like to see much less investor hedging in the coming days for me to get more comfortable about shorting.  But in any case, I'll still probably wait till after the CPI number to consider short sales.