Avoiding Mistakes

The more you repeat mistakes, the more you realize that trading is not about making great trades, but more about avoiding the same mistakes that you made in the past.  Although I didn't make any money on SPX during the SIVB selloff and subsequent rebound, I'm glad I didn't lose money.  10 years ago, I probably would already be averaging up into an underwater SPX short as the market grinds higher from a panic bottom (post SIVB on March 13).  Throughout the years, one of the most consistent patterns in the stock market is the V bottom off of a short term panic.  It is why I always try to avoid shorting within 2 weeks of a panic, especially if the reason for the panic is overblown, which is usually the case. 

The long term negative implications of credit tightening was not the reason people were panic selling, they were panic selling because it was the fear of a systemic crisis and financial contagion.  The panic from financial contagion was a bit irrational, and overblown, in my view, as soon as you saw the Feds step in to backstop banks with the BTFP and through the discount window with "not QE" balance sheet expansion.  This is why I avoided the short side the past couple of weeks.  But the negative economic implications from the steady drift from bank deposits to money markets and less lending/tighter credit is for real, but its not as catchy of a headline or incites much panic.  

Cutting through what is short term fear mongering and media hype, and what is truly impactful requires a mix of common sense and macro homework.  Its not always obvious, but usually the scarier the headline, the more likely the issue is overblown and the market overreacted.  In particular, geopolitical headlines usually fall under this type of news, as its always scary, but rarely has a long term impact on the market.  A big geopolitical event like a Russian invasion of Ukraine is the exception, not the rule.  And even the effects of that have mostly faded away a year later, despite the ongoing war.  

The stock market usually doesn't reward the obvious.  This time, the obvious conclusion was to sell stocks because of a potential financial crisis.  Over the past few weeks, they kept saying this is not 2008, which is like saying to someone that just cut his finger, oh, that's not as bad as getting stabbed in the heart.  To even bring up 2008 showed you how scared some investors got 2 weeks ago.  I should have instinctively known to at least buy a little bit the day after SIVB went bankrupt, just for a trade.  But playing it conservatively, I waited for an even bigger dip that never came.  A market doesn't give you much time or repeated opportunities to buy the low is a sign of strength.  

Now that the dust has settled and the market has overcome another "hurdle", I'm sure you will get those who feel like the stock market is invincible, being able to shrug off such "bad" news, as fund managers overanalyze the situation and end up chasing stocks at high prices, to re-risk after they de-risked near the bottom.  That is what active management does for you.  Get you scared near the bottom, and aggressive near the top.  Every January, I heard these active managers talk about how this is the year for active managers, and yet they always underperform the SPX.  Don't trade like those active managers.  They underperform for a reason.  You have to do things that don't feel natural.  It goes against human evolution to break away from the herd and ignore the advice of so-called experts on CNBC. 

Since my last blog post, we have seen the SPX face rip for 100 points, ruining the week for a lot of bears.  Shorting is not an easy game.  Not when you have the Fed eager to bailout at the slightest sign of stress, pumping in $400B at the drop of a hat.  Yeah, they say its "not QE", but it sure had the same effect as QE, which was a huge rally after it went into effect.  The Fed has shown who they really are.  If they were true inflation fighters, they would have let creative destruction take place, let some two-bit banks fail, even at the risk of a short term banking panic.  That would have been a guaranteed inflation killer.  But instead, they took the easy road, which was to bail them out.  No surprise there.

I find it interesting that the vast majority don't believe that the Fed will cut rates this year, because of sticky inflation, yet they ignore the Fed's inflationary actions of bailing out the banks, as if that doesn't show you that the Fed put is still there.  They still think that Powell will keep rates higher for longer, even if the economy weakens.  Have they not learned from history?  Even the biggest hawk in the history of the Fed, Volcker, took rates down rapidly when the economy went into recession despite high inflation, although it was moderating when he did it.  And no, he didn't wait till inflation hit 2% to cut rates.  Those spewing nonsense out there have been completely brainwashed by Fed forward guidance.  If you repeat lies enough times, eventually people believe it.  Joseph Goebbels, the Nazi propagandist knew this human tendency very well.

If your bear thesis relies on the Fed remaining hawkish and higher for longer as the economic data deteriorates, you should rethink that thesis.  History is not on your side.  The main reason I have a bearish view on this market is because there are still too many that believe the US economy is strong, because of the tight job market.  Economic weakness, not Fed hawkishness is the bear catalyst.  Fed hawkishness as a reason to be bearish was a 2022 story.  2023 is about the economy entering a real recession for the first time in 15 years and earnings going down more than expectations.  Macro is hard to predict, and I've been early on predicting a recession, like many others, but the more time that passes at these high rates, the more damage that is being done to the economy.  And I still can't fathom an everything bubble like we had post Covid, being resolved with a soft landing.  Anything is possible, but post bubble environments are usually deadly for stocks, and for the economy. 

Market is getting a bit closer to my SPX 4150-4200 sell zone.  At this pace, it gets there by the end of next week.  Its been 14 trading days since the SIVB bottom on March 13.  Usually these bear market rallies fizzle out after about 20-25 trading days.  Considering that we didn't get a huge flush out like you saw in June 2022, I doubt this rally extends for 2 months like that June to August 2022 countertrend rally.  I give this rally another 2 weeks to go higher before it likely flattens out and starts getting choppy.  For some reason, I have a feeling this market tops out after the banks report earnings in the middle of April, signaling the all clear for the scarecrow fund managers that always have to wait for the uncertainty to clear out before putting their chips back in to play. 

Smell a Rat

The stock market just doesn't seem to make much sense.  You have wild volatility in the bond market as financial crisis fears have changed market pricing for the next few months, from rate hikes to rate cuts.  The economically sensitive technology sector has taken the lead, based on some overzealous belief that its a safe haven as tech companies have lots of cash and low debt.  

It goes back to that gift that keeps on giving, the Covid stimulus, which was a huge boon for the wealthy and corporations, as they benefited greatly from fat PPP loans that were forgiven.  Corporations were also able to load up on low interest debt in 2020 and 2021, which set them up well for the next few years, locking in cheap funding.  The vast majority of the post Covid excess savings belongs to the wealthy, so they have lots of dry powder.  

It gives the top 10% very little incentive to sell stocks, because they already have a big cash hoard which is steadily getting bigger with nearly 5% interest on cash.  It doesn't matter what the bottom 90% do with their money, they don't have the firepower to move the SPX.  Only the top 10% do.  And the top 10% don't need to sell stocks because their balance sheet is stuffed with cash and low interest debt.  Here's a chart from a Next Economy substack post, (by the way, an excellent blog), showing the net financial position of households by income percentiles.  All the excess savings is in the top 20%, everyone else is below pre Covid levels. 

This most recent SIVB induced selloff just didn't have that staying power of those in 2022 because bonds rallied this time, which buffered a lot of portfolios against the volatility.  Anytime bonds rally in a stock market selloff, it provides a natural hedge for investors, and they have less fear and urgency to sell because their 60/40 stock/bond portfolio is not losing much.   Once the Fed stepped right in to bailout the banks, the banking crisis fears were overblown.  The Fed will always shows its true colors when the going gets tough.  Their main priority is to support growth/employment.  They love bailouts.  It makes them feel important and powerful.  They feel like a hero.  It pumps up their ego.  Inflation always takes a back seat in these situations.

Even though the Fed immediately brought in their bazooka to stop the panic, bank runs and banks going belly up make investors nervous, as they get 2008 flashbacks.  When investors are nervous, unless earnings are seriously getting hit, the headlines eventually fade away and stocks usually have a strong bounce back.  Based on leading indicators, earnings should go down rapidly in the 2nd half, so there could still be a couple of months of hopium for the bulls as they latch on to Fed pivot hopes. 

While financial contagion worries are prevalent, I don't think they are as important as everyone thinks, since the Fed WILL blow out any small fires with a firehose of liquidity.  The bigger problem, which will take some time to play out, is the deposit flight from the banks as the spread between bank savings rates and money markets funds are too big for even the lazy to ignore.  This fire can only be taken out by the Fed if they cut rates aggressively, which they don't seem too keen on doing at this juncture (expect that attitude to change in the summer).  

This exit from bank savings/checking to money markets will be a slow squeeze on the bank's main source of cheap funding (near zero rates), hurting profitability and reducing their ability to make loans.  The banks pull back on loan issuance and tighten credit to weather the storm.  That credit contraction will feed into the real economy over several months, so nothing dramatic in the short term, but it will be felt more and more later this year.  The banks were already tightening lending standards, as shown by the senior loan officer survey.  This will eventually cause less credit to flow, reducing economic activity, and leading to lots of layoffs. 

While its always alluring for bears to latch on to the big bang story of banks going under and a financial crisis, that's fighting the last war (2008), which the global central banks will not let happen, seeing how quick they are to bailout any systemically important bank/institution.  The less sexy bear thesis is an ordinary credit led contraction, where banks lend less money, investors hoard cash and hunker down, job losses pop up as the economy gets worse, earnings go down, reducing buybacks, taking away a key support for the stock market, and the excesses of the previous bubble get wrung out of the system as zombie companies die out in the first real recession in 14 years.  Instead of a big bang from a domino financial contagion event, the much more likely scenario is that of an old fashioned recession, this time with commercial real estate the weak point, along with manufacturing weakness.  It will be a slow bleed.  The economic data will get worse as the year goes on.  The main question is how bad does it get.  Many are predicting a mild recession.  But considering how much the Fed raised rates, and how long it has been since the last recession (2009), along with low organic growth, it would not surprise me if we get a deep recession this time.  

The SPX looks to have a short term ceiling at 4000, and a short term floor at 3900.  I am not going to play the range, but if I had to, I would rather be a buyer near the floor, than a seller near the ceiling.  I smell a rat in the stock market.  It seems like it wants to suck in the shorts, trapping them before eventually squeezing higher.  Its too resilient and it looks like it wants to go higher eventually after a bit more basing this week.  SPX 4150 by mid April would not surprise. 

Yellen > Powell

Yellen overshadowed her successor, Powell on FOMC day.  I've always felt that Yellen is a lot less dovish than her reputation.  Do you think Bernanke (or even Powell) would have gotten off the zero bound (the first rate hike in over 9 years) a few months after the SPX plunged 15% in a week, and with crude oil collapsing from over $100 to the $40s in the previous year?  She probably would have done a lot less QE than Powell did in 2020 and 2021, and would have likely ended it much sooner.  

I still don't know why some out there think so highly of Powell.  He's caved to the market to cut rates in 2019, which was unnecessary, considering the economy was nowhere close to recession.  And he overstayed his welcome with ZIRP and monster QE in 2021 with the biggest miscalculation since Trichet's rate hike in 2008, saying inflation is transitory and keeping ZIRP and QE going even with a booming economy with 6% inflation.  He started hiking  way too late.  And Powell's forward guidance has been more absurd than even Bernanke's, trying to forward guide 3 years into the future (said he would raise rates until 2024 in spring of 2021).  And now, Powell seems to be flip flopping like a day trader, sending out signals to the market via Nick Timiraos (last Friday) that he could pause if markets are weak heading into the FOMC meeting.  This is a week after leaning towards 50 bps due to hot CPI and NFPs the previous week.  He's wildly following what the crappy, manipulated data tells him. 

Yesterday, Yellen bluntly stated that she was not considering insuring all uninsured bank deposits.  That is NOT what the market was expecting.  With all the moves to rescue the two bit banks and pump more liquidity into the system, the market assumed that the Fed and Treasury were going to backstop all deposits.  After all, the financial markets have assumed that everything that could remotely cause systemic problems would be bailed out. 

Out of all the times that the Fed and Treasury have bailed out banks and institutions, they've only let one big one fail: Lehman Brothers.  And afterwards, they received a lot of the blame for the financial crisis because they didn't come to their rescue.  Ignoring the fact that the financial crisis was not caused by the Lehman bankruptcy, but by all the dog shit mortgages issued from 2004 to 2007, and the popping of the real estate and credit bubble in 2007 and 2008.  That real estate + credit bubble was global, as Europe also boosted short term growth in similar fashion.  Lehman was just collateral damage because they were holding the dog shit MBS/CLOs and other random crap on their books.  

One of the reasons that the market has shrugged off the SIVB and Signature Bank bankruptcies as well as Credit Suisse is because of how quickly the government and central bank came to the rescue with over the top bailouts which looks to be overkill for the situation at hand.  The Feds killed the bear not with a rifle, but with a bazooka.  That was comforting to the financial markets which forgot what it felt like to be coddled after hearing hawkish rhetoric for months on end.  But people forget that the markets have been coddled almost continuously since the LTCM debacle in 1998, as rate increases were slow and small, and rate cuts and QE were fast and big.  It is the reason that the SPX has been in overvalued territory for most of the 1998 to 2023 time period.  

That affirmation of the Fed put with the lightning fast bailout will be assumed to be the template for future financial conflagrations, a confirmation that the Fed put is alive and well, it just went into temporary hibernation.  While I lean bearish in the equity market, my bear thesis isn't dependent on financial contagion, a hawkish Fed, or sticky inflation, which is still what many fear.  My bearish thesis is purely cyclical, as in the economy will be weaker than what consensus is forecasting, because of the excesses of the previous cycle, where you had the biggest bubble in world history.  And the lagged effect of huge increases in interest rates in a highly leveraged economy that was addicted to zero rates, which nurtured tons of zombies, which are in a painful spot having to refinance debt at much higher rates.

That is why at this moment, where there is still some remaining fear of financial contagion and SPX down 5% from February highs, I prefer to express my view through a long bond position than a short equity position.  If the SPX was at local highs and there was more complacency and optimism among the crowd, a short equity position would also be worth taking.  With the high cash allocations among institutional investors, there is a lot of dry powder that can be put to work into stocks AND bonds.  So being careful about shorting stocks here.

We are seeing the return of the retail investor, as you are seeing meme stocks pumping again (GME).  NVDA is on fire.  And tech stocks, which are traditional retail favorites, have outperformed the broader market.  I expect that to continue as the Fed pivot to a pause becomes more clear in the coming weeks.  

Yesterday, you saw a very different Powell than you've seen since Jackson Hole.  He's put inflation on the back burner, and financial stability is the priority now.  He's not going to outright say that inflation is not their top priority, not with CPI still at 6%, but you could sense the lack of hawkishness in his press conference.  The SPX would have likely finished strong had it not been the bombshell that Yellen dropped on the market in some random speech which happened to be when Powell was speaking.   Despite the dot plot showing terminal rate at 5-5.25%, Powell didn't seem committed to another rate hike like he was in previous pressers.  And with so many in financial media saying that he shouldn't hike anymore, he's going to feel a lot of pressure at the next FOMC meeting to pause.  And we know from Powell's history, he has a history of caving into public/political pressure.  He's a politician first, central banker second.  It is the reason that he got re-nominated with an overwhelming vote in the Senate, politicians know how to work other politicians. 

Powell has broken the weaker regional banks with these rate hikes.  More rate hikes will only speed up the deposit flight from banks to money market funds.  And that will cause the banks to tighten their already tight lending standards that much more.  Pausing at 5% is sufficient to cause a steady flow of money leaving the banks towards the MMFs.  That money will be siloed in the Fed's RRP, so its not doing anything for the economy, unlike deposits which would be used by banks to either make new loans or buy MBS/Treasuries.  Deposit flight is deflationary.

The SPX seems to be range bound here, and realized volatility has not been able to keep up with the VIX levels lately.  Unless you see more near term stress in the regional banks (possible, but less than 50% IMO), SPX should probably grind higher from here into the seasonally strong month of April.  I have a lot of dry powder to put to work if we get rallies in some of these retail favorites which have been going up recently.  I see some traders (on Twitter) eager to put on shorts here, I think they are too early.  When they get squeezed out on further rallies towards 4150-4200, I will be there ready to put money to work.  Waiting for the bulls to get bold again to strike on the short side, it probably takes a few more weeks for that to happen. 

From Hawk to Dove

Last Sunday, when the BTFP facility was introduced to try to save the regional banks from bank runs, you had a big rally overnight which faded huge, with a 130 point swing from top to bottom before the cash open.  This time, you didn't get that big rally off the Credit Suisse bailout news, as you didn't have a "clean" bailout, as some bond holders ate giant losses in the process.  You had people on Twitter going on a tizzy over the lack of bailout for all bondholders as the equity still retained some value.  This will be forgotten about in 3 days but it got the bears excited for a moment.  The staying power of these headlines gets shorter and the effect gets weaker. 

When stocks struggle to go lower even as you continue to get bad news headlines about systematically important banks under stress, you know you are late in the selloff.  Its been over a month since the market topped out.  Most of the nervous stock holders have already sold at this point, and you will need to break technical levels at SPX 3800, and below to get stop loss selling and the fear necessary to get a swoon lower.  Given that the FOMC meeting is on Wednesday, the bears don't have much time left to drive this market down.  

In most cases, these scary news headlines are signs of a short term bad news bottom.  With the bond market rallying huge over the past week, you got some serious relief for the banks on the interest rate side, which cannot be ignored.  The regional banks will remain shaky until Powell cuts rates aggressively, mainly due to deposit flight for higher interest in money market funds.  But the money center banks should be fine in the short term, as they will be getting a lot of those deposits fleeing the smaller banks.  Beyond the next few weeks, without deep rate cuts, even the money center banks will be struggling.  They are too big to fail, so deposits are safe, but they also offer even lower rates than the regionals on savings, so they will also suffer deposit losses to higher yielding, risk-free instruments, especially as the public gets wiser on the huge interest rate differentials between bank savings and money markets.  

While the big bank headlines keep coming, the realized volatility has been dropping since the SIVB bomb first went.  This is typical price action when the market gets used to the daily negative news flow, and reacts less and less to each headline.  On a fundamental basis, I see more long term economic ramifications of these bank runs than systemic financial ones.  With the Fed and overseas governments willing and eager to backstop failing banks and to pump in liquidity without hesitation ($300B last week), you have taken away the short term systemic issues from panicked depositors/investors.  

The current issue worrying the market the most are the weakened bank balance sheets holding huge unrealized losses on their HTM portfolio, a problem that can be easily fixed with a hammer:  big rate cuts.  So its not going to be a long term problem.  Even deposits leaving the smaller banks can be covered by tapping the discount window or BTFP at market rates to avoid selling HTM bonds at a loss and the capital hit that comes with it.  The long term concern is the tighter credit and lending conditions that these bank runs have created.   They won't show up right away, so I am sure equity investors will forget about it over the next few weeks when the market calms down.  But these tighter conditions will be lasting, as the economic fundamentals are simultaneously deteriorating as excess savings are drawn down, and as housing slows even further.  Plus, you have the lagged effect of the 450 bps of rate hikes in the past 12 months, which the economy will feel more and more as the year goes on.  

I am optimistic in the short term as the market moves on from the banks to a potential end to rate hikes, which I expect soon.  As the stock market loves to do, it likes to front run future catalysts, and this time, it will be the much anticipated Fed pivot.  Paradoxically, the future economic weakness that these tightening bank lending and credit conditions create are what will allow the Fed to be more dovish and to end their rate hiking campaign sooner than most expected.  The stock market will have its usual Pavlovian response when the Fed is no longer hawkish and starts to signal a pause.  With the pivot in sight, the bond market will also add to the bullishness, as it won't be the weak link anymore which drags down equities.  I expect that bullish reflex response to push the SPX towards the YTD highs around 4150-4200, perhaps even a bit higher.  That's when things will get interesting.  That's when you can load up on a list of short names to ride down for the next wave down, which is usually the most brutal.  The one that comes after the Fed pivots towards future easing.  Below is an example in 2000-2001, showing price action after a Fed pause, signaling the end of a rate hiking cycle, and after the beginning of a cutting cycle.  

We are in a new phase of the bear market, the portion of the bear market when the economy notably slows down, but with that, comes lower bond yields which is initially embraced by the stock market as it looks forward to a Fed pivot.  These Fed pivot rallies are easier to short because they happen at the start of a recessionary environment of earnings declines and lower rates.  With all the angst over monster rate hikes and surging bond yields across the curve in 2022, it is only natural for the stock market to get excited about the end of this rate hiking cycle.  It is a trap.  There will be growing optimism in the coming weeks when the Fed heads are no longer talking 6% rates (Bullard, Kashkari, and other fair weather clowns), and instead have more balanced takes on future policy.  

I have low conviction on what Powell will do on Wednesday, but I am leaning towards 25 bps hike and dovish commentary that takes out talk of future rate hikes.  That will be taken positively by the Street, as a signal of a pause, and the end of this Fed rate hiking cycle.  Its possible Powell continues his hawk talk and leaves open the door for future rate hikes, which would NOT be taken well by the stock market, so I'm definitely not going to go into the meeting with bullish positions, but based on where we are in the monetary cycle, we are due for a Fed pivot rally very soon.  This should time up with seasonal equity strength from late March into late April, which is about as much of a rally as any bull should hope for.  At that point, it should be a free fire zone on the short side for stocks/ buying zone for bonds.  

One last note on the financials.  I expect financials underperformance on the next bear market rally.  Last week, you saw a lot of retail buying in the beaten up regional banks, a bad sign that speculators are playing for a bounce (chart of retail buying on the right).  They are the weakest hands and are guaranteed future sellers. 

Fundamentally, there are too many headwinds (mainly deposit flight to safer, higher yielding MMFs) and they are just not cheap enough to take on the possible go to zero risk.  They have become daytrader favorites, and they are exhibiting the classic daytrading intraday patterns.  Once the daytraders move on from the action, I expect these stocks to slowly drift lower over the next few months.

Same Old Fed

You thought the drug addict was clean after going to rehab, but its the same guy.  He's still going to chase that hit, always remembering the feeling of that first one.  Trying to relive those fun memories.  You thought it was a new Fed, no longer addicted to QE, focused on fighting inflation, thinking this was the 1970s.  Raising rates to sufficiently restrictive, and keeping them there, higher for longer.  No longer reaching for the money printer when things looked a bit shaky.  Sike.

Wall Street is a big psychological experiment in real-time.  You get to see how opinions and views evolve based on recent history and the current news flow.  Its hard-wired into most our reptilian brains over millions of years of evolution.  The extrapolation of recent history into the future.  Hearing the same thing over and over again from analysts and "experts" and eventually believing it.  

In early 2022, after repeated lies about transitory inflation and obnoxious forward guidance that stretched out to 3 years in the future (Fed hubris at its worst), you had knuckleheads in finance and banking that ate it up and extended duration to reach for yield in MBS and long bonds in a ZIRP environment.  SIVB was just another victim of believing in the Fed's forward guidance, thinking that they would keep rates at zero until 2024, while inflation was blooming in 2021.  

Powell was the drug dealer selling low rates, offering a 3 year guarantee, and reneging on that pledge after getting his nomination confirmed, just as heat from the public and politicians about inflation was boiling over.  Some of the B-team execs working at the regional banks took his word: hook, line, and sinker.  They didn't hedge duration risk, as that dampens profitability.  They didn't run a balanced book, running sky high duration assets against very short duration liabilities.  Thanks to the Fed from 2008 to 2021, who conditioned everyone that rates above zero were always temporary, and would be immediately brought back down to zero in a slowdown.  

Now you had a lot of traders and hedge funds that got blown out on the six sigma move in STIRs, as they bought into the higher for longer mantra, that Powell was going to hike to 6%, that inflation was sticky, jobs market was hot, and that the economy is strong.  All balderdash, but it was repeated over and over again, so people started believing.  They built up huge shorts in 2, 5, 10 year Treasuries.  Even though Fed forward guidance of higher for longer is about as believable as transitory inflation and zero rates until 2024 was 2 years ago, people bought into it.  When lies are repeated, eventually people believe it. 

People get used to zero interest rates.  For 13 years, its been zero, or near zero. That's why so many didn't even think about pulling out money from their banks' savings account earning next to nothing for higher yields in money markets and T-bills.  In the past, money markets and T-bills were offering zero as well.  But with this SIVB incident, the news has been plastered with stories about bank runs, making people actually think about what there money is doing in the bank.  Its earning next to nothing.  They are getting robbed of huge chunks of interest, while absorbing the risk of boneheaded risk managers at two-bit banks.  A raw deal. 

There are some out there screaming moral hazard about the bailouts, but they probably underestimate how much panic was brewing.   Judging by the outflows out of the regional banks into other banks and MMFs even with a bailout, it would have been an absolute deluge of money seeking safety, and it would probably have been the modern day version of the Panic of 1907.  That would kill inflation on the spot if they let Schumpeter's creative destruction take place, but you know they would never let that happen after the fallout they got from not bailing out Lehman in 2008.  

So after this heart attack among the regional banks, you have suddenly educated the masses about the dangers of having over $250K in a non money center bank.  Plus, to add insult to injury, some of them will finally realize that money markets are paying nearly 5% and its safer there than at these regionals.  And that they were just giving money away to these banks out of sheer ignorance for the past several months.  That is reason you had $121B flowing to the MMFs.  I expect those massive flows to continue out of bank deposits into money market funds and T-bills.  At this pace, it will make a serious dent into the deposit base of banks and force them to make up for it by either selling their AFS (available for sale) securities or hitting the discount window to pay out deposits and not have to dip into their HTM securities, which would force them to mark to market all of their HTM assets, crystallizing the loss on their book.  It will continue.  The seal has been broken.  Genie is out of the bottle.  

There is a chart going around showing the huge increase in the Fed balance sheet over the past week, an increase of $300B, about half of the QT done so far since 2022.  While its not QE, its not nothing either.  That is liquidity that the Fed has offered to banks instead of having that liquidity taken from the private sector.  It is one of the reasons that you had a strong rally this week in both stocks and bonds.  I expect that upward trend to continue unless Powell splashes cold water on the rally next Wednesday and hikes rates and signals more hikes by saying inflation is still too high, data dependent, and downplays what happened with the bank runs.  No strong lean on what he'll do next week, but I think he'll be more dovish than Lagarde yesterday, while still hiking 25 bps. 

Its a tricky environment, the economy is rapidly slowing but the lagging indicators which the Fed focuses on are still hot.  Credit will get tighter, but the Covid stimulus was so huge, that the US economy is hanging tough.  There are still a lot of excess savings.  And there is also the carrot of a Fed pivot coming sooner than people think, so its a dangerous time to short.  You will get that Fed pivot rally before the Fed cuts rates.  It will come when everyone realizes that the Fed is done hiking, and can now look forward to rate cuts, even if the Fed lies and says they are higher for longer after a pause.  That is the one whopper of a bull catalyst that could run the market up for several weeks.  But it would also be the easiest one to fade as the economy will be right at the starting line of a deep recession at that point.  

Currently holding some bonds, but mostly cash waiting for a good entry point to either add more bonds on a dip or short some of the retail names if they pop up on quasi QE delusions.  Stocks have been quite resilient this week, and it never reached levels where I was looking to buy dips.  Investors are still hardwired to buy stocks when they see the Fed and Treasury bailing out banks, thinking that the Fed is now on their side.  Its a hard habit to break.  It can only be broken with capitulation, and we're not even close. 

Band Aid on Humpty Dumpty

The volatility in stocks and bonds are off the hook.  130 point overnight range in SPX.  35 bps overnight range in 10 year yields.  They broke Humpty Dumpty and bandaids won't be enough to put it back together.  This haphazard bailout of depositors by providing par value loans on deep underwater hold to maturity (HTM) collateral is not going to placate the stock market for long.  Just out of the blue, Signature Bank was taken over by the FDIC without a warning on Sunday, just showing you how fragile the regional banks are.  They are loaded to the gills with underwater HTM collateral that no one wants except vulture hedge funds looking to pay 60 cents on the dollar.  And who's going to keep deposits at a crap regional bank collecting nearly zero interest when they can safely park their cash in money markets or T-bills at a brokerage firm and access cash same day via wire.  

The banks have a business model based on either dumb or lazy people who keep their money there collecting near zero interest when they could just buy a money market fund/ shorter term Treasury ETF through their stock broker.  These bank runs at regional banks should wake up a few of those lazy people into moving their funds to where they are better treated.

Backstopping the deposits prevents the bank runs, but it doesn't fix the root of the problem.  The banks are stuck with huge losses on their HTM collateral, and their deposits are moving out to places which offer much higher interest.  The banks either keeps rates low and let those deposits leave, or they substantially raise the interest on their deposits to keep the deposits that they do have, reducing profitability.  My bet is they try to wait it out, hoping this BTFP facility will keep their customers feeling safe, and hope that they are too dumb and lazy to move their cash to money markets or T-bills, to maintain their net interest margin.  

The broader economic implications of all this is tighter financial conditions, especially bank lending.  And with short term rates near 5%, there is little incentive for banks, especially regional banks to go out on the risk curve and lend in a slowing economy when they can just park their deposits in the RRP and earn the spread, which is huge because they are paying next to nothing on deposits.  And in case there is a bank run, they can quickly pay out without having to dip into their HTM pool and risk realizing losses for the whole portfolio and having to raise equity capital, which will be nearly impossible in this environment.  

The BTFP program is a small band aid put on the patient that is bleeding profusely from the shotgun wound that was buying long term MBS and Treasuries at ridiculously low yields when the Fed promised not to raise rates until 2024.  It was a combination of greed, incompetence, and belief in Fed forward guidance that has put these regional banks in a bind, hoping that their customers are blissfully unaware of the bank's precarious situation.  

The only lasting solution to the problem is rate cuts, and lots of them.  Fine tuning 50-100 bps will not get the job done.  The only way to get the whole yield curve lower to help out bank portfolios is to cut rates and signal more cuts in the future.  If Powell hikes in March and continues his hawk act, the stock market will revolt.  We could have a December 2018 scenario when Powell raised 25 bps to 2.5% and signaled automatic pilot for QT and didn't talk about a pause.  We know what happened after.  Stocks plunged for the next few days and Powell pivoted.  

This time, the economy is in a much worse spot as rates are double what they were in December 2018 with leading indicators much weaker.  Housing is weaker than 2018.  Global economy is weaker than 2018.  Inflation much higher.  If inflation doesn't come down as fast as the bond market is pricing, and the Fed still cuts, you may get huge steepening of the yield curve, like you saw in early to mid 2008, and not even get a move lower in long bond yields, which would not be good for mortgages or the banks' portfolios.  

So what is the Fed going to do here?  Will Powell think he stopped the bank runs and its all systems go on the fight against inflation with more 25 bps rate hikes?  As much as Powell wants to be the next Volcker, 2023 is not 1980.  The leverage built up in the system is much greater.  The US has become bailout nation as any little blowup is quickly defused with some random bazooka facility meant to keep Humpty Dumpty together.  In my view, Powell will fold like a cheap lawn chair.  His hawk act won't be taken well when you have banks blowing up.  Powell can resolve this either voluntarily (1) or involuntarily (2):  1)  Powell decides to cease and desist on his Volcker wannabe hiking campaign, and signals a pause, which will boost stocks for a few weeks and stanch the bleeding in the regional banks.   2)  Powell keeps the same message of higher for longer and the market forces his hand by plunging until he cries uncle.  

I am leaning towards 1) but either way, the market will get what it wants:  rate cuts. And these rate cuts will be warranted because the psychology around regional banks has completely changed, and now almost everyone is aware of how much duration risk these banks are carrying, along with deposit flight risk in a high interest rate environment.  Credit will get much tighter, lending standards will get stricter, and less money will flow to the economy.  This SIVB blowup has just kickstarted what was already a cycle that was going down, albeit slowly.  This has just sped things up and brought forward the recession timeline.  

Stocks are trading quite sanguine given the circumstances, with lighter hedge fund positioning in equities helping out here.  This reminds me of the end of the bull market in August 2007 when stocks were plunging as signs of stress in the banking system were percolating, and the Fed came in to cut the rate for the discount window, and followed up with a 50 bps rate cut in September.  The market embraced the Fed pivoting to rate cuts and rallied all the way from mid August to early October 2007.  

I can picture a similar situation when the Fed pivots and rallies on rate cut hopes.  But that rally probably lasts just a few weeks before investors realize they are buying right before a huge earnings recession in a fast slowing economy.  Historically, bear markets bottom after the Fed is well into its rate cutting cycle.  It could be different this time, as the markets are wiser in regards to how powerful Fed easing is towards financial markets.  But at these still rich equity market valuations, I lean towards history rhyming and market bottoming only after several rate cuts and a real capitulation in the stock market.   

We are in a different ballgame than 2022.  2022 was about inflation fears leading to rate shock fears.   2023 will be about credit tightening fears leading to recession fears.  The stock/bond correlation has flipped, and we're back to the same old negative correlation reflexive moves of stocks and bonds.  I expect that to be the case until you get a final big capitulation bottom in stocks.

Yesterday, we saw credit spreads blow out a bit, nothing crazy, but considering the sideways trading day in stocks, its a warning sign to be cautious trying to buy the dip here.  Also the MOVE index has hit a new high, above the 2020 Covid highs, so bond vol. is still in a raging bull market.  We have CPI today, and it seems the crowd is expecting another hot number.  But economic data is now a sideshow, so its not going to matter for long.  At current levels in SPX, not a compelling case for a buy or a sell.  I am a small buyer if we get one more flush lower below 3800.  I see a much better risk/reward buying Treasuries on any pullbacks.  The past few days have been an emphatic move that is signaling a bull curve steepening for the rest of the year.  

The Fed's power hiking cycle has finally broken something and that's usually when the Fed pivots.  If we do get a little bit more panic in the market, that could mark an intermediate term bottom IF Powell signals an end to rate hikes after March (even if he hikes 25 bps).  We could see a reflexive chase move higher on the Powell pivot and SPX could go towards 4200.  Which would be a great spot to put on long term shorts.  If Powell doesn't pivot next week, this market is not going to like it and it'll probably have to go much lower to get him to act.  In that case, we're going to see some savage moves.

SIVB Bomb

Things are starting to blow up.  The puppets are running as the bombs go off.  Silicon Valley Bank is the latest victim as the rapid pace of rate hikes is leading to some hairy consequences.  

The SIVB situation has shined a light on how fake those book values are in the banks.  Those hold to maturity (HTM) securities are not marked to market.  A lot of those securities were bought in 2020 and 2021 when 10 year yields ranged from 0.5% to 1.75%.  And when short term rates were hugging zero.  That is the asset side of the banks' balance sheets.  The banks are hanging on to huge unrealized losses on their assets.  Their liabilities are short term deposits, which they are currently paying way below market rates on.  Sure, a lot of the people holding them have balances that are small or are too dumb or lazy to seek higher yields on their cash.  But the smarter ones have started moving most of their deposits out of the banks into money markets, T-bills, and other short term cash alternatives.  QT will slowly suck out reserves, making deposits that much more valuable to banks going forward.  The banks' liabilities, deposits, are where they will have to increase the rates they pay out to keep them from moving out, reducing their net interest margin. 

People were ignoring this side effect of the Fed raising 450 bps in less than a year.  The effects of yield curve inversions have been slow to surface because of all the excess savings from the Covid stimulus and the massive Fed balance sheet.  But those are slowly being drawn down, just as the lagged effect of the rate hikes flow more and more into the real economy.  A poisonous brew that's getting a bit more toxic by the day. 

The yield curve inversion went parabolic this week with Powell's hawkish testimony, opening the door to a return to 50 bps hike in March.  The market has been taking the 2-10s curve inversion in stride, and you even saw articles about the economy being a "Godot" recession, as it seems that the recession is always 6 months away.  Investors got complacent on the potential economic weakness coming later this year. That complacency finally caught up to the market yesterday.  Until we got the SIVB news drop yesterday, the major worry was hot economic data that would force the Fed to hike 50 bps in March and maybe get to a 6% terminal.  Wall Street has such a short memory, little patience, and is so focused on the now, that it loses focus and overthinks as the path meanders towards the eventual destination that most agree on, which is a Fed engineered recession. 

The time lags between rate hikes and its effect on the economy have given equity bulls a false sense of invincibility, almost as if the economy is so strong, it can handle these high rates without a problem.  I even started hearing nonsense from Warren Mosler advocates about how raising interest rates is stimulative for the economy, as it increases interest payments from the government to the private sector.  This ignores all the non government borrowers who have to pay interest from their cash flows, not from printing more Treasuries.  Sure, the rich with big cash holdings will benefit from higher rates, but almost all of their marginal dollars aren't going to be spent on goods and services, but rather put towards stocks, bonds, or cash equivalents.  Those with the most propensity to spend their marginal dollars are the ones who are the most punished by higher interest rates.  Those people in the middle to bottom end of the income spectrum are the ones who are going to get squeezed by higher interest payments and less available credit as lending standards tighten.  You are already seeing that with a rise in auto delinquencies.  

Also don't forget that student debt payments have been suspended, and will resume once the Supreme Court decides on whether its legal or not for Biden to forgive that debt, or June 30, which ever comes earlier.  A ridiculously long suspension for no real  reason, other than thoughtless Covid pork jammed down peoples' throats who loved it. 

Here is a chart showing the lag effect and what the current economy is feeling based on the past rate hikes, assuming the following, from Michael Lebowitz's recent article on the Fed:  

 Rate hikes should affect the economy with the following lags:

• 25% First month
• 50% within three months
• 75% within nine months
• 85% within fifteen months
• 100% within two years

Using those assumptions, the overall economy is feeling like rates are at 2.44%, not 4.5%.  But its rising fast.  By the summer, the lagged effective Fed funds rate will be 3.5%.  Of course, this is a rough estimate, but it points to the speed of this rate hiking cycle, and how the tightening effects will be felt much more later this year than right now.  

It was fashionable to compare the current period to the 1970s, with the high inflation rates conjuring up that stagflationary and sticky inflation period.  But I see more similarities to 2001 and 2008 than 1973.  Its never the same recession.  With the government running huge budget deficits and reinvigorating a big chunk of household balance sheets with ridiculous amounts of money spew, you are not going to have anything as bad as 2008.  But the current situation looks worse than 2001.  Back then, the natural growth rate of the economy was higher, and you didn't exhaust monetary policy by staying at ZIRP and QEing for over a decade.  Greenspan cut rates from 6.50% to 1.00% from 2001 to 2003, even though the economy only had a mild recession, and housing was barely affected during that period.  That was hugely stimulative to the real estate sector, as households could refi to much lower interest rates, and the economy was strong from 2004 to 2006.  

This time, even if the Fed cuts from 5% to 0%, you aren't going to get the same stimulative effect.  Most homeowners won't refi even at ZIRP, because long term yields won't be going down below 1% like it did in 2020.  And you already have a huge chunk of outstanding corporate debt issued at much lower rates than today, unlike in 2001.  So a return to ZIRP won't drastically change the debt profile of corporations and won't have much of an effect on interest expense.  Don't forget, the early 2000s was when the internet exploded into mainstream use, and that was a huge productivity boost to the economy, a deflationary technology that has no parallels today.  You also had offshoring going into overdrive with China, keeping inflation low.  This time, there are no breakthrough productivity game changers in recent years to help keep inflation in check.  Offshoring is almost maxed out and its more likely to go in the other direction.  It will make it that much harder to keep inflation down, making it more difficult for the Fed to keep rates low. 

As soon as I write a post about the market being tamer we get a big move down with the SIVB bomb hitting the tape.  You always have to stay humble in this business, you will be wrong over and over again.  This negative correlation move with stocks diving and bonds squeezing higher was completely out of the blue, so quickly after Powell put 50 bps on the table.  But it reinforces my belief that unlike 2022, you are more likely to see stocks and bonds trade in opposite directions, like it did for most of the QE era.  In the end of a hiking cycle, bad economic data is still good for stocks, but that will only last for a couple months.  If you keep getting bad data, the focus will shift from inflation to growth, and that's when you really get the negative correlation moves in stocks and bonds.  That's probably happening this summer, and yesterday gave a sneak preview of things to come.  I don't recommend entering any short positions here as the bank contagion fears percolate ahead of the weekend, as I don't like to enter shorts when I see blood on the streets.  I also wouldn't be long either, at least until we get closer to the December lows around SPX 3800. Another 1 or 2 days of selloffs could get us to that level, where I would take a shot on the long side for a trade. 

From Altered Beast to Human

2023 is a much tamer animal than 2022.  If you want to make an analogy, 2022 was a wolf in the wild.  2023 is a kid in the backyard.  We got a throwback from 2022:  Hawk Powell.  If you heard that in 2022, it would have been absolute chaos.  This time, not so much.  Its not doing much damage to the long bond, which hardly moved down on the threat of a faster pace of rate hikes if data comes in hot this month.  But it crushed the short end of the yield curve, and now we have 2-10s curve inversion of 100 bps.  Something unthinkable a year ago.  

The power flattening of the curve, is telling you:  1) these high rates are not sustainable for very long and will cause economic weakness 2) there is a ton of liquidity in the bond market, as even QT and large Treasury issuance is unable to cause much of a selloff in the long end.  The relative tightness of credit spreads is also a signal of abundant liquidity.  The Fed's QT program is a joke.  MBS is hardly rolling off, as no one will re-fi in this environment, so the Fed is only reducing Treasuries in its balance sheet, and that is capped at $60B/month.  Don't forget back in the peak of the Covid money spew in spring 2020, the Fed were buying $75B/day of Treasuries.  Adding liquidity with a firehose, and taking it out with a straw.  Typical.  The Fed's balance sheet is still sky high, and bloated with low yielding coupon debt.  The Fed has essentially eaten the huge losses in MBS that private market would have had to bear in 2022.  This time, with the Fed's thumb all over the MBS market, there will be no mortgage crisis.  Its just likely to just be a classic slow bleed economic slowdown. 

If we just had normal liquidity conditions, it would be a toxic environment for stocks.  But we don't have normal liquidity conditions.  The budget deficit is high, the Fed balance sheet is still huge, and all that money pumped out in 2020 and 2021 is floating around in the financial markets, looking for a home.  Everything the government has done over the past several years has been stimulative:  tax cuts for corporations and middle/lower class in 2017, $5 trillion in Covid stimulus in 2020 and 2021, big fiscal budget increases the last 3 years, Inflation Reduction Act, student debt forgiveness, and most recently COLA inflation adjustments to Social Security, boosting handouts to the elderly.  No wonder the budget deficit hit 6% of GDP last year, even with huge capital gains and an overheating economy.  In the past, those budget deficits during boom times would be between 0-2% of GDP.  That's 5% more spending and less taxes which goes straight from the government's printing press to the pocketbooks of the masses.  If the government spending continues at this pace, those are the foundations of a sustained inflationary environment.  While it is very unlikely you will get much one-off spending bills in the next 2 years due to gridlock in Washington, it is likely you will get more pork stimulus starting from 2025 with a new President and/or a Democrat majority Congress.  

So as a short seller even though you have the Fed on your side (for a few more months), you are still fighting some strong forces on the other side, which is the ample accumulated liquidity.  In 2022, the vicious bond bear market and the rate shock was sufficient for the bears to overcome the big liquidity advantage that the bulls have.  This year, its a more even battle.  

Another reason for the resilience of the stock market:  volatility.  Volatility is down in both the stock and bond market.  Credit spreads are tighter than the 2nd half of 2022.  The uncertainty on the rate hike path for the Fed, despite yesterday's hawk Powell performance, is lowered from what you saw in 2022.  As a result, you get milder selloffs on bad news and the lowered volatility encourages dip buying.  When volatility is high, as it was in 2022, the demand for riskier assets such as equities and long duration bonds goes down.  But as the volatility in both the stock and bond market has died down in 2023, that suppressed demand for duration has come back even though the earnings fundamentals for stocks or long term inflation expectations for bonds haven't improved.  

What am I seeing in the COT reports and sell side CTA trackers is CTAs being much less short than they were in the fall of 2022.  Vol control funds and risk parity are steadily adding back long exposure to stocks, and to a lesser extent bonds, as both the VIX and MOVE index are lower than 2nd half 2022 levels.  Over the next few weeks, the vol control and risk parity funds should be done adding to their risk exposure.  At that point, you get a better set up on the short side as seasonality starts to turn worse with  tax refund season behind us and with a continued drawdown on excess savings from US consumers.  Its not going to be a sudden crisis situation like 2008, but more of a drawn out drip lower as the fiscal stimulus from 2020 and 2021 begin to wear off and credit conditions tightening with the higher rates.  

It is easy to forget about the Covid stimulus when all we hear about is the Fed and rising interest rates but the aftereffects are still reverberating.  $5 trillion dollar dropped from a helicopter into the economy distorts reality.  We are still not back to normal, no matter how fast the Fed wants to get inflation down.  One has to question why the Fed is not increasing the rolloff of the balance sheet, as the $60B/month of Treasuries has been woefully inadequate.  I guess Powell doesn't want to hurt too many of his friends in private equity by doing a power QT of say, $200B/month of Treasuries.  It can actually be argued that raising short term interest rates is just a stimulus for the rich holding a lot of cash, and just punishing those who have to borrow money.  If the Fed actually wanted to tighten financial conditions and reduce wealth inequality, he should stop hiking rates and instead increase the pace of QT with outright sales of long end Treasuries.  Of course, that will not happen, because there are no out of the box thinkers at the Fed and they still want to coddle the bond market while trying to kill consumer demand.  

Back to the markets.  We reached a short term bottom last Thursday, earlier than I expected, as this year's markets are not selling off that extra few days that really makes the longs question themselves, like what happened in 2022.  Short term traders need to recalibrate themselves to expect less on the downside, and expect more time spent at the top.  Until you get a noticeable shift down in the economy that leads to more layoffs and less sanguine consumers, you will continue with this low volatility, low energy market.  Compared to the 2013 to 2019 markets, this is not boring.  But compared to 2022, it is. 

I've noticed that the new mantra from the stock "experts" on TV is:  cash is not trash.  It is unusual and rare for the stock "experts" to tout cash as a good alternative. Considering their tendency to be late to a trend, it probably means that cash will be underperforming a stock and bond portfolio in the coming months.  If you see economic data cool off like the leading indicators are forecasting, that will provide support for the bond market which will provide support for the stock market, as the market will price in a less hawkish Fed and a return of the goldilocks/soft landing thesis.  Under that scenario, I could picture the 10 year going back down towards the bottom of its YTD range, to 3.50%, and the SPX to return to the top of its range, towards 4200.  

I have used the weakness yesterday to reduce my single stock shorts and add some bond exposure.  I see downside in fixed income as being limited, and thus downside in stocks as well.  The strength of the long end of the yield curve is a sign of underlying demand for bonds that won't go away easily.  The demand for duration is slowly coming back as the trauma from 2022 is further in the rear view mirror.  Those planning to decrease bond portfolio duration is at a 2 year low at 13%. 

With the overflowing liquidity out there, and at current price levels, buying bonds is a superior way of expressing a view of a weaker economy later this year than shorting the equity index.  Don't get caught up in 2022 mode of trading and investing.  This year has a different character to it.  It is tamer.  Those that can adjust to this new reality will outperform those that are still stuck on the 2022 playbook of shorting stocks and bonds.

Cash is Popular

After the weak close last Friday and the continued weakness in the bond market, I was looking for a capitulation this week to clear the decks and allow for a reflexive bounce that could last 3-5 trading days.  But the bears just couldn't get the job done and equities showed resilience, bouncing hard despite the 10 year yield breaking out above 4%, a new YTD high.  I would not read too much into one day's trading action, but it does fit in with my view that when volatility is shrinking in the stock and bond markets, it makes it tougher to shake out the bulls, as they are emboldened by the less treacherous environment, relative to 2022.  This is a mirage, as there just hasn't been enough time since the Fed really got aggressive with rate hikes (Jun-Jul 2022) to torpedo the economy.  Its not easy to time the turn of these economic cycles, but best estimate here is that it will be around summer time when the economic weakness becomes apparent and starts to spook the stock market.  Until then, equity vol will be subdued, with all the liquidity still sloshing around.  

These days, with T-bill yields above 5%, its been common to see analysts tout cash as the best thing to hold here, which is rare.  Usually these analysts and pundits that come out on TV are almost always bullish on stocks and rarely ever recommend cash.  In many ways, I agree, but anytime I hear something this consensus, it makes me think of scenarios where holding cash will lead to underperformance.  The most obvious thing I can think of would be if risk parity starts to perform strongly in the next few months.   

Holding cash is the anti-risk parity trade.  For asset managers, holding a lot of cash is like rooting for both stocks and bonds to go down.  It is a conservative way to express a bearish view.  It makes me re-think my original 2023 thesis of a huge downtrend starting in May and ending in July/August that takes the SPX towards 3200-3300 in a wave of capitulation selling.  It could take longer for the stock market to crack than I originally expected.  But I expect it to crack due to the high valuations and earnings pressure that will come in like a lion in the 2nd half of the year. 

Many are recommending cash because it yields 5% a year, but that averages out to less than 0.5% a month.  Not a great way to outperform.  It could get uncomfortable for those holding cash if inflation cools off in the next 3 months due to base effects and lagged effect of M2 deceleration, and it looks like a soft landing.  That would boost both stocks and bonds and leave behind cash holders earning 0.5% per month.  And anytime there is underperformance in the investment management community, they have a tendency to chase to catch up, which could take the SPX back towards 4200-4300 before enough supply comes out to stop the rally.  

Short term, it will be the bond market that ultimately decides the direction of the stock market.  The only thing that can sustain an equity rally is if the economic data cools down, starting with the nonfarm payrolls report on March 10, and CPI on March 13.  I am leaning towards the employment picture being weaker than consensus, as other labor market indicators are pointing to a less bullish picture.  But I've been wrong for the past few months, and the nonfarm payrolls is a horribly inaccurate number, so anything can happen.  Same view on the CPI, as the January effect will no longer be there and leading indicators still point towards disinflation.  

The equity put call ratios have been perking up over the past few days, there is some concern these days among the fast money traders out there.  That is as the SPX has bounced strongly off the SPX 3900-3920 support zone.  Bears used up a lot of their fuel taking the market lower over the past 2 weeks.  SPX is short term oversold.  I am not bullish, but I wouldn't be holding a lot of shorts either.  Still short individual stocks, which I might hedge with a long SPX position if there is another selloff next week towards that SPX 3900-3920 area.  April was horrible last year, but historically has been a very strong month for stocks as tax season and consumers spending or investing their tax refunds provide a short term boost to the economy and markets.  The big move lower in the SPX is looking like a Q2/Q3 story.  A stock market that chops around between SPX 3900 and 4150 without any big moves for the next 2 months is looking like the most likely scenario.