Investors are Smarter

Its been 54 days since the bottom on June 16.  That's quite a long rally while still staying under the 200 day moving average.   You would think that a rally that's lasted so long and gone up 14% from the bottom would suck in more believers, more FOMO money.  But anecdotally, all I see are calls for a near term top and an end to the bear market rally.  Are investors just smarter than they were in the past and know not to fight the Fed and the liquidity cycle?  

In many ways, today's investors are smarter than they were 10-20 years ago, back when the Fed wasn't the main focus all the time.  After 13 years of a liquidity bull market via the Fed, investors seem to have finally caught on to the game, that its all about liquidity, how much money is being pumped into the system.  The economy doesn't matter, its all about Fed words and actions.  And that's reflected in a deeply rooted skepticism of this rally that is going on despite Fed hawkish rhetoric and deteriorating economic leading indicators.  

But still, I can't bring myself to join the crowd in the bear camp when the speculator short positions are so large in the face of a huge rally.  It is downright dangerous to short when there is such a huge short position that is on the cusp of being unwound as the drawdown is nearing the stop loss point for most of those holding index futures shorts.  I would like to see at least some moderation in that short position as well some good news (lower than expected CPI number?) before I put on the bear suit.  If we do get a reduction in shorts (looking for a reduction of at least 50%) in the COT data, then I'll gladly join the bears and put on a Nasdaq short, as we are back to levels where risk/reward is skewed towards the downside.  

The last 2 days, we've gotten warnings from semis in NVDA and MU, which isn't surprising considering they are at the front lines of the economic slowdown.  Software/cloud companies are at the back of the line, but not immune, they just feel the effects of the slowdown with a few months lag.  Fundamentally, tech is the most overvalued and also one of the most exposed to a broad economic slowdown.  Its assumed that growth outperforms value in a recession because value names are more cyclical, but tech is no longer a niche sector.  Tech is not so much a secular growth story anymore when it dominates the weightings in the S&P 500, it has basically become the highest beta portion of the market.  

We are seeing the retail investors go crazy again chasing meme stocks like AMC and BBBY.  That doesn't tell me too much about the institutional side, but its at least an early warning sign that fear has dissipated to such a point that retail is now willing to chase garbage stocks and play the musical chairs game again. Put/call ratios are inching lower, but not to levels that are extreme yet. 

Perhaps a relief rally after the CPI number on Wednesday that takes the SPX close to 4250 could be the blowoff top of this bear market rally to cleanse positioning to less short levels, get the crowd more complacent, and allow for the bearish fundamentals to reassert themselves on this market.  I can't comfortably short at this point with so many shorts still hanging on waiting for the market to go much lower to bail them out.  Usually the market seeks out the weakest hands (the shorts at this point) and squeezes them out before eventually going to its preferred destination (much lower, IMO, but could be wrong).