The Elephant in the Room

If you are usually a bear, these are the times where you have to rack up your points, because bear markets don't come around often. And when they do, they usually don't last anywhere as long as bull markets.  Most investors are natural bulls, as they have faith in past stock market history continuing forever, believing that the last 100 years will repeat over the next 100 years, and that annual 8-10% stock market gains are a given.  Bears like me think that's preposterous, thinking that kind of future return is only possible in a high inflation environment that's tolerated by the central bank, politicians, and the masses.  That kind of optimism in the US stock market ignores what has happened in the stock markets in Asia and Europe in recent history, even during a falling rate environment.  

Those who are pessimistic about the market point to valuations, past bear markets, leading indicators, current economic trends, structually higher inflation from commodities, and a higher interest rate environment with a hawkish Fed as reasons to be bearish.  Those who are optimistic about the market point to bearish sentiment and the oversold technicals.  One side carries a lot more fundamental backing while the other side is expecting some greater fools will start chasing stocks again when there is a rally, creating a tradable bounce.  Anything can happen, but when the weight of the evidence overwhelmingly favors the sell side, then I just end up having conviction and better luck trading that side.  The buy side seems to be looking at the markets from a much shorter term time horizon, looking for a bear market rally, and that speaks volumes about how much conviction they have.  There are many that are looking to sell a bounce.  And I don't see too many who would be willing to chase prices higher for more than a few days.  So logically, the rallies should be short lived.  

This is not like the June lows, when there was still hopes of a quick, relatively painless Fed rate hiking cycle, as reflected by the big rally in bonds from mid June to early August.  Also there were still lots of hope for a soft landing.  This time, the Fed has been more concrete about their rate hike plans, and Powell has backed himself into a corner, and he would lose face, as well as some credibility if he didn't back up his tough talk with tough actions for at least another meeting or two.  And now, most expect a recession, unlike 3 months ago, so they won't be as many suckers with FOMO zealously chasing the market, as if the bear market is over.  

You are seeing more signs of stress in the FX and fixed income markets, as governments are resorting to interventions to keep things under control.  That's not a sign of a healthy environment.  And I don't think Credit Suisse is a big deal.  That's a red herring.  That's meaningless.  The elephant in the room is the Fed, and they are taking a huge dump on asset markets.  It is all that matters.  Even if they pivot, its not going to lift markets for long unless they start signaling cuts.  A pause and less hawkish talk will not be enough, especially if Fed funds is over 4%. 

Its an odd market.  Usually when you see such a sharp move down, basically straight down since the CPI release 3 weeks ago, you get more fear and a reluctance to buy the dip.  But its almost as if I see more fear from those short who are looking to lock in gains for fear of losing it back in a bear market rally.  Up until late Friday, I could sense the dip buying bulls looking at that double bottom on the charts, feeling confident that there would be a short term rally before further selling.  You could see it in the mediocre put/call ratios for a big down day on Thursday, and even more complacency on Friday on a small up day, with put/call ratio trading below 1 until the last 30 minute selloff.  

And the COT data confirms this, as speculators were heavy buyers while the SPX went from 3855 to 3647 from 9/20 to 9/27.  That's a pretty bearish combination, a sharp selloff and speculators buying into it. 

The lack of any counter trend rallies during the post CPI downtrend tells you a lot about the market.  Its not common to see such consistent selling, with almost no relief for the bulls.  The one big up day last week was immediately taken back the next day.  

One bullish sign, albeit small, is that you are finally seeing the generals get punished, as AAPL and TSLA are now selling off more than the market.  Its when investors start liquidating the winners that you are getting late in the selloff.  Its not an exact timing tool, but it does make me want to reduce shorts a bit, all else being equal. 

 Its been a while since we've had a nasty close.  Even on some big down days lately, there has been that closing hour mini ripper into the close, just to put a little seed of doubt into the short sellers, and give a bit of hope to the bulls.  It was probably daytrading short sellers who wanted cover and not take home shorts overnight.  

I actually covered half of my shorts near the Friday close just to have some more dry powder just in case the bulls try to run it up again this week, as fund flows in the new month could provide a bit of a bounce.  There are still too many looking for a bounce for me to want to cover all my shorts, although we are inching closer to my target of SPX 3520.  

We have a gap up in stocks and bonds off that weak close on Friday, as first day of the month automatic fund flows buoy the market.  This is inelastic money so its going to buy regardless, and there are still die hard bulls who blindly just plow money into stocks on a regular basis.   And now that the much feared September behind us, you have the optimists with renewed hopes of a better market.  With nonfarm payrolls and CPI coming up in the next several days, I don't expect buyers to aggressively chase the market higher.  If we get a rally today towards Friday's highs, I will probably put on those shorts again that I covered.