Cherry Bomb Market

There are markets where up trends last for a long time, and there are chop markets where up trends are brief and don't have staying power.  It feels like we're in one of those cherry bomb markets.  If you have ever lit a cherry bomb firecracker, you know that the fuse is very short.  So once you light the fuse, you have to run.  On the long side, you have can't stick around and wait for much higher prices to sell.  If you hold the bags for too long, they explode in your hand, like a short fuse cherry.  In the past, the bombs had much longer fuses, so bulls had plenty of time to stay invested, ride the trends higher, and get out comfortably without rushing.  This is a totally different.  It punishes the late seller, and the graceful selling windows are much smaller and narrower.  A much less forgiving market for longs. 

This uptrend off the October low has been choppy with deep pullbacks, with the market topping out as soon as investors got comfortable with whatever piece of bullish data or news that came out.  

Over the past 3 months, there have been 4 pullbacks after a good news pop as shown in the above chart.  The SPX didn't have staying power after each of those pops.  The investors who chased the rallies by buying on good news were punished.  The reason this keeps happening is because the big picture of tight liquidity conditions and earnings deterioration are still there.  In fact, we are getting closer and closer to the point in the cycle where leading indicators showing weakness start seeping into the coincident indicators and the hard data.  That's when the soft landing hopes dissipate and a re-valuation lower for equities is likely.  Maybe its because I'm a permabear, but I still don't understand how investors can get optimistic under these conditions.  

Its quite telling though that the optimists seem to be playing for short term move higher, not a long uptrend.  That means the active investors are looking to sell quickly and are not sticky investors, looking to hold for a long, big move higher.  Those are the worst owners of stocks.  They have low conviction, and sell quickly on a whim.  It appears those buyers of meme stocks, high beta tech, bitcoin, etc. are low conviction buyers looking for a quick hit and run play, hoping that the rally can last for a few more weeks so they can sell higher.  You don't see many new, highly convicted buy and hold investors jumping into US stocks.  Its all short term, technical based traders and investors that think they can jump in and out of the market and be nimble before the tide turns.  I don't like playing those games, because you have to deal with rug pull risk, which can come quickly and violently after bear market rallies.  

So what is the reason for the recent big rally in tech stocks and high beta names?  It appears to be a combination of being oversold, rally in bonds, and optimism that layoffs at the big tech companies will help to cut costs and boost profit margins.  Its almost as if all those workers were basically meaningless to the bottom line and were just dead weight.  I can't argue against that, but having fewer workers just means more work for those remaining, which isn't sustainable in the long run.  

Its not a good sign for equity investors to see oil creeping back over 80 and acting strong ahead of the Chinese re-opening.  The last thing this market needs is an uptrend in oil prices just as the higher interest rates really start kicking in to the real economy.  Nothing fundamental has changed from when the SPX was at 3800 in late December, and where it closed around 4020.  Its just been some price insensitive portfolio allocations getting jammed through at the start of the year along with neat excuses for the rally:  soft landing hopes (because yields are going lower while employment remains strong), weaker dollar, China re-opening, technical breakout above 200 day moving average, etc.  

Really specious reasoning out there which make the rallies more fleeting than if there were actual real fundamental changes going on that would signal that the worst is over.  Its just one of those listless periods where there are no strong drivers in the short term, so we chop around.  The hard data hasn't rolled over yet, so the soft landing hopes are still alive.  And bond yields are now much less volatile, as disinflation continues, so stock investors are finding comfort in that.  Expecting more of the same chop in the coming weeks, until the last gasp rally after the last rate hike in March.  From April onwards, I am expecting a 2nd leg down that will be brutal.  No need to think too far ahead, just try to ride the choppy waves in the meantime.  Staying on the short side of course.