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.