Insanity

Sometimes you just have to shake your head.  It can feel like you are the one who's insane when everyone else is doing something else and making money at your expense.  That's what its felt like for the past 2 weeks.  I've been patient with the shorts, waiting for the bulls to regain their sanity, and they haven't.  Is it a new bull market, making me the one who's insane, or is it just a bear market rally, which is making the crowd insane.  We'll find out in the coming months.  

I'm not a Twitter trader, so I can admit to losing.  It's part of the game.  That being said, haven't seen that kind of mania in speculative stocks since last August, when I made the mistake of assuming that the market would linger near the rally highs around 4150-4300, covering shorts too early.  Of course, the market folded like a cheap lawn chair and went straight down for the next 45 days.  

On to the bond market.  2022 wasn't easy if you had any faith in the bond market, which I did and still do.  2023 should be quite a different story.  The coincident indicators are starting to show weakness, although employment remains stout, which keeps the soft landing crowd believing in stocks.  Leading indicators, however, are a horror show.  I'm noticing some interesting parallels between now and 2019 for the bond market, except this time, Powell is being stubbornly hawkish, not making a quick dovish pivot.  Here is a look at the leveraged funds position in 5 year and 10 year Treasuries back then and now:

5 year Treasury Futures COT Leveraged Funds Net Positions

10 year Treasury Futures COT Leveraged Funds Net Positions

Leveraged funds are hedge funds: a mix of CTAs, macro, and fixed income funds that use Treasury futures to either hedge their cash bonds or to make outright bets on rates.  They are trend followers, but they stick with the trend even when its going against them in the short term if the long term trend is still intact.  Of course, long term trends start from short term trends.  I believe we are at one of those inflection points in the bond market, as the long term trend has been down for over 2 years, since mid 2020 to late 2022.  But now, it looks like there is a battle going on, between the bulls and bears.  I lean on the bullish side as I am more bearish on the global economy than most, and less of a believer in the central banks' forward guidance, which changes quicker than people think.  

As you can see above, leveraged funds are putting on big short positions in both 5yr and 10 yr Treasuries, the shortest they've been since late 2019 in 10 yr Treasuries.  But the price action is running counter to their positioning, and that's when things get interesting.  I expect pension funds, mom and pop investors overweight equities and who sold their bond funds in 2022, to jump back in when the coast is clear.  That would be when the Fed pauses rate hikes.  And that looks likely after a final 25 bps in March.  

Back to the stock market.  The 2021 stock slinging daytraders and meme stock crowd is back, this time jumping on the TSLA bandwagon again, along with a slew of other bubble stocks like ARKK, COIN, MSTR, etc.  They can't get enough of the action, and are pushing these stocks back to where they were in November, before the big plunge lower in all things tech related from late November to late December.  Now you are back to levels where the shorts are looking quite juicy for a lot of these former bubble boys.  I haven't put on any big positions in these yet, as I'm waiting for the FOMC and ECB meetings to be behind us before feeding the ducks.  

I sense there is some caution among investors and EVEN these gun slinging speculators ahead of the FOMC and ECB meetings this week.  They remember all the times last year when Powell came out hawkish as hell and hammered the markets.  So they are bracing for impact and selling some stocks ahead of time.  With Powell all but guaranteed to do 25 bps, his hawkish rhetoric won't have the same sting as when he went 75 bps and went full hawk.  It would be totally toothless for him to do 25 bps and then talk tough.  Its like a guy with a toy pea shooter acting like Mr. Tough Guy shooting plastic BB pellets into the crowd.  It just doesn't have much effect, no matter how tough he sounds.  

So I think these never say die bulls will have a sense of relief once this week's events are over as well as earnings season and ramp stocks back up again, past SPX 4100, creating that fake breakout above resistance that every paper napkin technician can see in the charts.  Once you get that move above 4100, you will truly see euphoria and be able to put on long term shorts.  I was expecting to put out the shorts in the spring, not expecting so much enthusiasm so quickly after the December washout of spec names, but here we are.  You have to play the hand that is dealt, and it looks like I'll have to put on the long term shorts earlier than I expect this year.  Got out of most of my underwater shorts yesterday, and will get out of the rest today.  Leaving dry powder for next week for the long term shorting campaign.