Still Fighting It

Shorts are quite stubborn these days.  They won't throw in the towel.  You would think with a 2%+ face ripper to a new local high and above 4200, a lot of shorts would finally cover and cut their losses, but that's not what I'm seeing in the options market.  The put/call ratio ended up at 0.85, which is a bit high considering the rally and positive news on CPI.  A bit shocking really, but the shorts are hanging on, sticking to their belief that this is a bear market rally.  I agree, but I don't want to get run over as they rush to cover, so I've been patiently waiting.  

I am stretching to find signs that speculators are changing their tune and becoming less bearish on this market, but its been mostly the same regardless of the price action.  Everything is received negatively, even a lower than expected CPI brought out the skeptics who feel like its ridiculous for the market to rally so much on an 8.5% CPI number.  Its just not what I want to hear when I am looking to put on a short position.  I trust the numbers and the data, and don't put much weight on the Twitter/CNBC talk, but they are both confirming the same thing:  shorts are not covering, and keep coming up with excuses to fight this rally.  

I am now resigned to the fact that nothing barring a continuous mind boggling rally to new all time highs will convert these bears to being bulls.  It doesn't mean that the market will just keep rallying because the shorts don't reduce their positions, but it does make catching a top riskier and lower probability.  Would like to see some kind of a blowoff top with signs of aggressive call buying/lack of put buying before I get aggressive on the short side.  

If we get another 1% move higher, that would take the SPX above 4250, a high enough level where I feel comfortable putting on shorts and taking some heat in the short term because of the skewed risk/reward.  

There are a few things that would increase the probability that a top is coming soon:  

1.  Weakness in bonds, with 10 year yields going back towards 3%+.  

2.  A big reduction in short positions among speculators in the COT data coming out tomorrow.  

3.  Total put/call ratio below 0.80 for 2 straight days.  

Looking back over the past 20 years, the only time I remember investors being so stubbornly bearish (2020 was almost like this, but not to this degree) was the fall of 2015, after the face ripping rally off the double bottom in late September, taking the SPX all the way back over 2100, an 11% rally in a month, taking back all the losses from the previous selloff.  The market chopped around for a couple of months and speculators took off a big portion of their futures short positions, and then the SPX fell off a cliff soon afterwards.  In late 2015, after a huge rally in October, traders were quite skeptical about the market in November/December and most expected another big selloff and they were right, one of the few times when the consensus was bearish over the past 20 years and it played out that way. 

P.S.  (10:40 AM ET)  As we squeeze higher here, it finally looks like we are getting a blowoff top with panicky short covering and put/call ratios are quite low, but still a lot of time left in the day.  Also notable is the weakness on lower than expected CPI and PPI in the bond market, as we will need to see yields go higher to increase the odds of a top.  Good signs so far for a near term top.  Looking to scale into shorts later today and Friday.