Economy =/= Financial Markets

People are negative.  The pessimism about the economy is similar to what we saw in late December 2022, when you had a lot of investors calling for an imminent recession and a difficult first half of 2023.  That also happened to coincide with a significant pullback from SPX 4100 down to below 3800, during a volatile time period.  SPX realized vol was around 20.  This time, you hardly have any pullback in the SPX, as it is lingering near the highs, with very little volatility.  Realized vol is now around 10.  So you have half the volatility that you did compared to last time people were similarly gloomy on the economy. 

SPX Realized Vol

The knee jerk contrarians will view this as a bullish sign for the stock market, as you have investors who are bearish on the economy.  But the economy doesn't act like the stock market.  And people don't trade the economy.  They trade stocks.  If you look at investor positioning, you get a different story now than at the end of 2022.   GS Prime Broker data shows net leverage about 5% higher now than versus the end of December. 

GS Prime Broker Hedge Fund Positions

ES Futures Asset Manager Net Position

Not only is the SPX about 300 points higher, hedge fund net leverage is about 4% higher, and asset manager net long position in ES has grown by over 100K contracts from end of 2022 to April 18.  It is asset managers, not leveraged funds which are the better historical fades in the CFTC COT futures reports.  

So investors are acting like they are scared of a recession.  In any case, it seems almost everyone expects a mild recession, where earnings won't go down much. 

Let's get back to the economy.  There are times when the crowd is too pessimistic on the economy, too optimistic on the economy, and when they are about right.  So while you have almost everyone on CNBC/Bloomberg/Twitter talking about a coming recession, like they did in late December, they are positioned much more bullishly than back then.  You got a surprisingly strong start to 2023 for the economy due to Social Security COLA adjustment higher, higher tax brackets lowering percent of taxes withheld starting in 2023, and a strong stock/credit market.  Those positive catalysts are fading as the stock market has stalled out under SPX 4200, the credit market has tightened with bank lending, and Fed funds rate is about to be 75 bps higher in a few days versus late 2022.  Let's not forget about the lagged effect of rolling maturities from the lowest rates in financial history to levels 3-5% higher across the curve.  This doesn't even get to the reflexive feedback loop from the inventory de-stocking cycle which continues to chug along.  

In some ways, the crowd doesn't seem to be beared up enough relative to what the economy will look like in the 2nd half of the year.  Contrary to late 2022, when they were too bearish on the economy before credit tightened enough and before some of the lag effects took hold.  Its been so long since we've had a real recession (2020 was fake) that investors seem to have forgotten how a very weak economy causes a domino effect where weakness begets more weakness until the Fed or the government comes in with big time stimulus.  I doubt the government with come to the rescue considering the House is majority Republican, and they are not in the business of pumping up the economy ahead of November 2024 when a Democrat president is seeking re-election.  

The debt ceiling debate will be the perfect opportunity for McCarthy and the Republicans to take a stand, knowing that any short term blow back for not giving in to Biden and the financial markets will be made up for big time by an economy that will be weaker without ever increasing government spending, easing the way for a Republican victory in 2024 as the economy is in a deep recession.   

So expect no fiscal pump, leaving the Fed as the Lone Ranger who needs to come to the rescue.  And considering how much rhetoric Powell has spewed about killing inflation and higher for longer and not repeating the mistake of the 1970s, there will need to be some notable economic pain before Powell comes in with the bazooka this time.  He will eventually, but I would expect a few small cuts here and there in late 2023/early 2024 that won't be enough, which will force the Fed to go even bigger in the middle of 2024, possibly back to ZIRP.  

While the markets are quite boring these days with volatility going back to 2019 levels, the coming earnings disappointments in the 2nd half of 2023 along with more layoffs and a weakening jobs market should bring back the volatility which will make it a more favorable environment for traders.  This is a fallow period, setting up the harvest later in the year.  I've put on a small short position in some retail favorite stocks, but I am waiting for the May FOMC meeting to put on an SPX/NDX short.  The May meeting could be the final bull catalyst for the bulls who will likely celebrate the end of Fed rate hikes, which will be the worst time to go long/best time to go short.  A false break above SPX 4200 would be an exquisite shorting opportunity. 

The Fed Pause

The Fed hiking cycle appears to be coming to an end at the May FOMC meeting, with Fed governors coming out last week to reiterate market pricing of a 25 bps rate hike in May, but also saying that they see a pause afterwards.  So let's make the assumption that the last hike of this cycle is in May. 

Fed Funds Rate (1999-2023)

Here is the SPX after the last rate hike and first cut in 2000-2001.

Obviously when you do this kind of analysis, the timing of the last Fed hike and first Fed cut in each business cycle is a huge variable.  In 2000, the Fed was about on target with the last rate hike, and the first rate cut, not hiking too late, and not cutting too early/too late.  Remember, the final rate hike in May 2000 happened near the peak of a massive internet bubble, so there was going to be a lot of pain once the Fed had gotten through with its rate hikes.  Despite being at bubble levels, you still had a brief grace period for the SPX after the last rate hike, as it chopped around in a range for a few months, grinding a bit higher before going on a massive downtrend into the first rate cut, which was only good for a 1 month rally, and then further weakness afterwards.  This is typically what you would expect from an average Fed cycle.  

Here is the SPX after the last rate hike and first cut in 2006-2007. 

This time, the Fed was slow to hike rates in 2004 to 2006, going just 25 bps at a time, nurturing a huge housing bubble, which gathered a momentum of its own, keeping the economy resilient for several months after the last rate hike in June 2006.  This is probably the most unusual Fed cycle in recent history, as the economy was able to brush off the higher interest rates and an inverted yield curve for over a year, before finally succumbing to the dual pressure of high rates and a popping of a massive real estate bubble.  The lags of monetary policy were longer than usual as the reflexivity of the real estate mania took a life of its own and credit kept booming despite the higher rates, as the momentum dragged economic growth higher for longer than most business cycles.  Thus, you had a huge rally after the last rate hike, one that lasted a year.  When the economy started to weaken and you got early signs of things breaking in the summer of 2007, the Fed came in with a rate cut which was good for about a 1 month rally, but that was just a bull trap into a massive downtrend.  

Here is the SPX after the last rate hike and first cut in 2018-2019. 

In this cycle, you had a Fed that just got bullied by the stock market.  When Powell made his final rate hike in December 2018, the economy was steady, but growth was slowing.  There were no obvious signs of a recession coming, yet Powell pivoted in January 2019 because....... the stock market went down.  This is where Powell cemented his reputation as a caver, as a folder.  In this case, the stock market was already down over 10% from the highs when the Fed made its last rate hike, and was helped immensely by Powell's pivot, because you had a Fed that was promising easier money when the economy wasn't even that weak.  It was the best situation imaginable for stocks and you had a relentless rally all the way to the first rate cut, which was unnecessary but Powell did it just to keep his promise, even though the economy was strengthening again by the time he made that call.  What happens when the Fed cuts rates when the economy is not weak?  You get a rally, although it was choppy due to overblown trade war fears at the time, once people realized that was a nothingburger, it was off to the races for 6 months, blasting through all time highs and going up relentlessly for 13%.  

Once again, the Fed is faced with a decision on what to do after its final rate hike, which is most likely in May.  The Fed is laying the groundwork for a long pause at above 5% Fed funds rate.  Its one thing to pause at a restrictive level of rates when the economy is slowing and there are no signs of a recession, its whole another thing to pause when the economy is slowing but there are signs of recession in manufacturing and commercial real estate, as well as tech, with layoff announcements accumulating.  

Let's not forget that this economy has a much slower natural growth rate now versus 2000 or 2007, when the demographics was younger, as the baby boomers were in their prime working years, as well as faster population growth.  Productivity growth was also greater at that time.  Global growth was also much higher because China was booming in the 2000s.  So the baseline growth rate is much lower now, which makes a 5% FFR much more restrictive than 5% in 2007 or 2000.  Let's not forget the long period of zero or near zero rates from 2008 to 2021, which incentivized corporations and investors to pile on low interest rate debt to leverage capital for higher returns.  That's not so feasible when short term rates go from 0% to 5%.  So you can absolutely bet that investment will be drastically reduced at these level of rates, especially as the massive distortions created by $6 trillion of fiscal stimulus is no longer there pumping everything higher. 

People talk about today like it is the 1970s, just because that was the last time you had high inflation.  But today couldn't be more different than the 1970s.  Just the overall debt levels in the US and global economy are on a whole another stratosphere than back then.  Less debt = higher tolerance for high interest rates.  More debt = lower tolerance for high interest rates.  The natural growth rate of the economy was much higher.  The population much younger.  No savings glut keeping interest rates down.  There was almost no offshoring to put downward pressure on wages.  Just a totally different world now.  

The Fed hiked so late in this business cycle that its putting the most pressure on the economy when its naturally slowing from the lack of pentup demand for goods and too much inventory(the inventory de-stocking cycle) and the popping of the everything bubble.  The Fed should have been hiking a year earlier, in spring 2021, and that would have been able to slowly bring down the economy with monetary tightening.  Instead, they have back loaded rate hikes and jammed it in over a year, while the business cycle is on the downtrend.  

Compared to May 2000, June 2006, and December 2018, this is the weakest the economy has been when the Fed made its last rate hike.  And its also the most inverted yield curve, mainly because these rates are unsustainable in the long run for this high debt, slow growth economy.  And why are rates so high?  As a reaction to a one time global fiscal stimulus bonanza that caused massive inflation.  An inflation wave that many are extrapolating out into the next several years, just because that's what people do.  With the coming debt ceiling fight and the Republicans' desire not to help Biden in 2024, you can bet on McCarthy not playing ball, looking for either a budget freeze or sequestration for FY 2024.  And don't forget the student debt moratorium gets lifted at the end of August, which will be a drag on consumption later this year.  Plus all the credit tightening and lag effects of higher rates going to work to slow down loan growth and investment.  

The equity market is trading in its own reality, with huge stock buybacks providing the demand as investors increase their cash holdings. 

Those big buybacks will be difficult to maintain when earnings are dropping hard, as I expect in the 2nd half of the year.  Its going to be interesting to see how the stock market trades when the buyback bid is much weaker than it has been for the last few years. 

The coming weakness will really test Powell's mettle to see if he is willing to torpedo the economy and cause a deep recession to try to be the next Volcker.  Powell is quite nonchalant now and seems as if the things will be fine just keeping rates above 5%, but the economy is already noticeably slowing (rising jobless claims, fewer job openings, very weak ISMs, weak demand for diesel/trucking/shipping, and weakening retail sales).  I doubt Powell will be able to hold off on rate cuts as long as he wants.  The economy will be too weak for him to just sit and do nothing.  The market will force a cut, as it usually does when the economy enters a full blown recession.  My guesstimate for that to happen is 3 to 6 months from now (July-October).  Timing when the worm turns is always difficult, which is why I am leaving dry powder available just in case the bulls go overboard.  

I am mostly on the sidelines when it comes to playing the stock index.  The second half of April, after tax reporting season, is usually a bullish time of the year for the stock market, as you get buybacks coming back after the blackout period during earnings season.  I don't expect anything too bad from Q1 earnings, it will be a different story for Q2 and Q3.  For now, its not likely you'll see any big bombs being dropped this season, so you could get a relief rally.  Positioning is not that favorable for bulls, so I would only expect a small rally.  The SPX could grind a bit higher from here, although fundamentals are too weak, and its already up over 350 points from the March lows so I doubt you see any big rallies from here.  Thinking SPX 4200-4220 is as high as it can go before hitting a wall of reality, and even that might be tough to reach.  

I will start layering into short positions if the SPX gets closer to 4200.  The top of this rally should come in early May, around the time the Fed officially signals that they are on pause after their last rate hike, which will probably be front run by eager beaver longs who don't want to miss a Fed "pivot" rally.  A Fed pivot is only bullish when they are pivoting while stocks are down big, and/or the economic conditions are not so weak.  You have neither in the current situation.  It will make for a messy 2nd half of the year.

Long Bonds vs Short Stocks

The 2 most common ways to express a bearish view on the economy is to be long government bonds and to short stocks.  Last year, one of those worked very well, the other one was a disaster.  Investors fight the last war.  They have been clobbered trying to buy dips in Treasuries for over 2 years, as you can see from the TLT chart below.  

Despite the big drop in the SPX in 2022, the real economy was quite resilient, still riding the inflationary wave from the bazooka Covid stimulus.  That was a disaster for Treasuries, as high inflation, high nominal GDP growth, and a Fed starting a power hiking cycle was the perfect storm.  

But its a different story now.  Inflation has peaked, even though price levels are still rising.  People sometimes forget that inflation is a rate of change measurement.  Even as prices go higher, as long as they are going higher at a slower rate, then inflation goes down.  That's what's happening now.  And due to last year's blow off top in crude oil, you have some abnormally large base effects coming through for the next few months.  This will bring year over year CPI down dramatically in the coming months.  People talk about inflation being sticky, but this is what the CPI readings will be with the corresponding month on month inflation numbers.  With a month on month inflation number at 0.3%, which is near consensus, the CPI will be down to 2.75% by June. 

I am hearing very few people talk about this.  People are still more worried about sticky inflation, despite WTI trading around 80, lower than almost all of 2022.  A CPI below 3%, as jobs numbers start to shrink, tighter credit in the economy due to less bank lending,  and more cash hoarding into MMFs: near ideal conditions for bonds.  As fuel for the fire, hedge funds and CTAs are still positioned very short despite the big rally since SIVB went bust.  The speculator net position in 5 yr Treasuries is the shortest since 2018. 

 

Also, you had huge outflows out of bond funds last year, the most since 2010, which is atypical as the age bracket with the most money, the boomers, will be adding to their bond weighting and reducing their equity weighting over time.  You are starting to get some reversal in that trend in 2023, but still a long ways to go to undo last year's massive outflows. 

There has been a sea change in household asset allocations since the start of the ZIRP and QE era in 2008.  Households are now heavily allocated in equities (35.6%) and have very little fixed income exposure (5.8%).  

Household Allocation to Equities as Percentage of Financial Assets

Household Allocation to Bonds as Percentage of Financial Assets

Just as the yields offered by bonds is the most compelling since 2007, you are seeing most investors heavily overweight stocks and underweight bonds in their portfolio.  

From a big picture standpoint, both being long bonds or short stocks for the next 6 months look like a good risk/reward trade.  But I give the edge to being long bonds because of the underweight positioning of most investors in fixed income, and the popularity of cash, which will get deployed sooner or later.  I expect most of that cash to flow towards bonds as the economy continues to weaken in 2023.  Also, being long bonds is a less crowded trade due to still lingering inflation fears than being short equities.  When most of CNBC Fast Money are bearish, as they have been for the past few weeks, I am reluctant to get aggressively short SPX. 

On the recent action in the stock and bond market:  you are seeing the beginning of a divergence in price action with stocks and bonds, a subtle return of the negative correlation.  It appears that bad news is acting as a positive for bonds, but no longer a positive for stocks.  This makes sense because the Fed is basically done with their rate hiking cycle, and any good news will not encourage the Fed to hike beyond May.  But bad news won't encourage them to cut either right away, thus the divergent path of stocks and bonds.  

I've noticed quite a few who are puzzled by the resilience of stocks despite signs of a weakening economy and a likely hike in May (currently 70% odds from Fed funds futures).  A lot of it is due to a much lower realized volatility in the indices, making vol control funds add equity exposure.  Also you have the seasonally strong April time period which is usually good for stocks.  And you have hedge funds that are still at low net equity exposure, which keeps potential bids in the market as hedge funds are more likely to add exposure than decrease it.  And lastly, there is the Fed's pivot card which still hasn't been pulled out, but is getting closer and closer.  What I mean by pivot is the Fed saying they will be pausing, which is akin to opening the door to future cuts, because naturally at these high rates, with the economy slowing and credit tightening, its a matter of when, not if they cut.  That will be the equity rally to fade. 

Pounding the Poor

Inequality is deflationary.  Raising interest rates exacerbates inequality.  The higher the interest rates, the more money flows from borrowers to savers.  Most savings are held by the wealthy, so they are the recipients of interest income.  The poor are the ones running up credit card debt and auto debt.  They mostly don't own houses, so they don't have mortgage debt because they have no home equity.  The poor are taking the brunt of the punishment for the inflationary money spew of 2020 and 2021.  That is on top of the drop in median income as a percentage of GDP/capita.  The bottom half are taking a smaller portion of the pie, as the corporations increase their profit margins at the expense of labor.  I see nothing to change that situation. 

I find it interesting that credit card debt has gone from 13.15% in June 2007, when Fed funds rate was at 5.25%, and is now at 20.35% in April 2023, with Fed funds rate at 4.83%.  Over the course of 16 years, credit card issuers have fattened up their profit margins. 

The stock market isn't really a reflection of the economy, its a reflection of corporations' ability to generate cash flow.  The biggest corporate expense is from labor.  The median wage to GDP/capita ratio has been trending down for the last 40 years.  A boon for corporate profit margins.  Globalization leads to wage arbitrage, and corporations gain a big advantage over labor with fewer corporate competitors for that labor. 

As much as people like to hype up deglobalization, its bunk.  The long term trend of higher Chinese exports continues. 

Unless you get a lot more anti trust enforcement, a lot more corporate competition in the US, and a lot less favorable tax regime for corporations and the wealthy, the long term demand for stocks will be there, either from institutions or from companies  themselves.  Of course, this favorable situation for corporate America is reflected in fat profit margins, which were at a historic high just a year ago, and historically high valuations.  This is why its very unlikely you will ever get to anything resembling cheap valuations in the SPX.  My base case scenario which is an old fashioned credit tightening led recession, SPX probably bottoms around last year's lows of 3500-3600.  I just don't see the SPX going down towards 3000-3200 like some of the bears out there.  There is just too much liquidity and cash sloshing around. 

Unlike 2022, its not a slam dunk to short rallies anymore.  Even though the economy is definitely weaker this year than last year.  Valuations are high, so upside is limited, but cash levels are also high, which means there are a lot of potential buyers waiting to pounce at lower valuations.  Corporations are still doing a ton of buybacks, providing a consistent bid for the market.  I would still lean short here if I had to choose a position right now for the next 6 month, due to the economic weakness which is being underestimated.

This week went a long way towards correcting the misperception out there that the consumer is strong, that the US economy is not close to a recession.  The leading indicators are finally starting to work their way into the coincident indicators like employment.  This time, its very unlikely to be a headfake like December 2022, when we had a similar shift in investor perceptions on the economy towards recession.  Short rates are even higher now, the jobs market is starting to soften, and banks are much tighter with credit and lending. 

The analysts and fund managers that come on TV have turned more cautious on the economy, but they still think that the Fed won't cut rates this year due to high inflation.  But the leading indicators for inflation are coming down. 

By the time they come on TV and start thinking that the Fed will start cutting, its will be too late to take advantage.  The best trade for the next 6 months is being long the short end of the curve, as the yield curve steepens sharply as the crowd realizes that rate cuts are imminent and the economy is in recession.  Those that think Powell will just sit, stay higher for longer, and let the economy deteriorate with Fed funds at 5% while job losses accumulate and inflation comes down are delusional.  

The Fed are like bad traders, they can't sit still.  They've made a bad trade by repeating the transitory inflation lie and cutting too late, and followed that up with another bad trade by overreacting to lagging data and overhiking.  Now they will make another mistake, which will be to not proactively cut rates, waiting for the lagging indicators to tell them that its ok to cut, which will be way too late.  A lot of damage has been done.  The longer the Fed delays rate cuts, it just accumulates even more damage.

Investors suddenly seem gloomy again, with those weak ISM numbers and low ADP stoking recession fears.  Its tempting to see those weak economic numbers and go short, expecting an imminent downtrend, but I'm cautious about the Fed pivot fueling one last short squeeze and hedge fund chase for performance.  And there is also the risk that a lower than expected CPI number next week could fuel another euphoric move higher.  So I remain mostly in cash, with some bonds.  I would be a buyer of dips in the short end in fixed income and a seller of rips around SPX 4200.  Tech and retail favorites are preferred short targets.   

On Commercial Real Estate, Risk Parity, and SPX

The SPX just keeps chugging along, going up again, despite OPEC putting in a production cut which squeezed oil prices higher, and a recessionary ISM number.  No matter how many times investors see markets go up on bad economic news, they still don't get bulled up during those situations.  It just feels unnatural for the stock market to go up as the economy gets worse. The market loves to climb a wall of worry, and there are lots of things its worrying about.  Financial contagion, inflation, recession, commercial real estate, etc. 

Risk parity is such a dominant force in the financial markets, that anytime you see bonds rally, usually on bad economic data, its hard for stocks to selloff a lot.  The exceptions, which are deep recessions and financial crises, are uncommon, so the odds are against you to short stocks when bonds are rallying hard.  The foundation of the whole pension industry is based on risk parity, a portfolio of stocks and bonds, with bonds providing diversification and a "free" hedge against stock volatility.  Of course, its not a free hedge, when inflation is rampant, but in all other cases, its a great hedge, as its a positive carry hedge, unlike being long volatility.  With bonds repriced much lower after the carnage in 2022, I expect it to provide that risk-off hedge that will mitigate against investors panic selling stocks unless we get a deep recession, which is definitely possible, but probably less than a 50% chance of happening. 

Just watching CNBC, you can sense the skepticism that the "professionals" have towards this rally.  They always fight the last war.  The last war was inflation, which wreaked havoc in 2022, and that's left some fresh wounds that get people nervous about being long stocks while inflation is still high, but falling.  This mindset is the reason that oil, which has been in a huge downtrend since last summer, gets the crowd all bulled up at the first sign of strength.  Disregarding the fact that OPEC production cuts have happened due to underlying demand weakness that necessitated those cuts.  It was a veritable love fest for energy on Fast Money yesterday, which should make oil bulls nervous.  

Speaking of past wars, all I hear these days is about how there will be another crisis because of commercial real estate and how it's like residential real estate in 2007-2008.  Its fashionable these days to be short commercial real estate stocks/REITs.  I am no real estate expert, but residential real estate is owned by both the middle class and the rich.  The GFC in 2008 affected a huge swath of the income spectrum, and the real estate bubble at that time was huge compared to this past one.  And you had a lot less money in the system sloshing around back then.  Unlike residential, commercial real estate is owned by just the rich.  And the only real negative sector of commercial real estate is office space, which is in oversupply, but is generally in prime locations where the value of the real estate is more in the land than in the property built on that land.  If office real estate gets cheap enough, there will be buyers who just tear down/renovate the building to residential as soon as they get permits to do so.  And based on how popular cash is these days, there are a LOT of potential buyers waiting to pounce on any good opportunities.

Anyway, I'm of the lonely opinion that work from home is a fad, and corporations will soon realize that they are getting much less productivity from their workers when they are not in the office.  Even if it means having to pay for office space, having workers together in an office is always going to be more productive than when they are at home.  Being productive is a burden for the worker, which is why they want to work from home, where they don't have to constantly look over their shoulder and can slack off as their boss isn't around.  But with the lack of competition in the US, corporations have the bargaining power over labor, despite the tight labor market.  That's the gilded age for you, with oligopolies in almost every sector of the economy. 

From a class perspective, the wealthy are not going to be the weak point in the next recession.  The government's deficits are the private sectors' surpluses.  The deficits have been huge since 2020.  And most of it went to the top of the income spectrum.  The wealthy amassed a giant financial war chest from fiscal profligacy over the past 3 years, and are bathing in cash that's earning 5% by doing nothing.  The trickle down effect from some commercial real estate developers losing money and some banks writing down losses is overestimated, in my view.  That's literally a drop in the bucket for the wealthy, who will only feel pain if you get a repeat of 2022, which is not going to happen, as inflation has peaked and the Fed is looking set to pause very soon. 

What's more likely to be the weak point in the next recession is the majority that is not in the top 20%, the group that are renting, have no home equity, and are feeling the squeeze from higher inflation (as corporations use their oligopoly pricing power to expand profit margins) outpacing their wage growth.  Also, quite a few will get laid off as the economy enters recession due to a credit contraction caused by deposit flight at the banks. This bottom 60%, will be the ones cutting back on consumption, both goods and services, later this year and in 2024.  This is not just a US phenomena.  Its happening in Europe and Asia.  A synchronous global slowdown.

Here is a simple way of looking at the timeline from Fed rate hikes to rate cuts.  

Fed raises rates  ----> Less loan demand at higher rates + more deposit flight from banks to money markets ----> Tighter credit + less money flowing through the economy ----with a lag ---->  Recession leading to job cuts -----> Fed cuts rates

Some can argue about the Fed reaction function now that we've had high inflation, many feeling as if the Fed will be late to cut rates and be less aggressive than in the past.  That's possible, but seeing how quickly the Fed came to bailout a two-bit bank in SIVB at the drop of a hat, I think people are overestimating the hawkish resolve of Powell and company.  They are doves at heart.  They only put on the hawk costume when it suits their political motives.  

Back to the SPX.  When I look at the CFTC COT report, I want to see the net position of asset managers, which are the best fades over the intermediate term.  They got a bit long in the middle of February, and the SPX promptly had a selloff that lasted 4 weeks.  If anything, that 4 week selloff tells you that we're not in a bull market.  You rarely get 4 week selloffs in a bull trend.  But positioning did come down in March, and while net longs are not as low as it was last fall, it has dipped back towards more neutral territory.  On a longer term basis, asset manager net position is on the lower end of historical averages.

SPX Futures Net Position of Asset Managers

But the price action has been quite bullish ever since SIVB went under, and based on hedge fund positioning reports from last week, it appears that hedgies have low net equity exposure and are the ones that are probably scrambling the past few days chasing stocks higher.  Once again, hedge funds have proved that they exist to absorb market risk, while siphoning off fees from investors. 

Based on a combination of investor positioning, seasonality, and recent bond strength, it appears that the path of least resistance for the next few weeks is higher, although the bulk of the gains for this rally are behind us, as I see limited upside above SPX 4200, which is just 2% away.  For the bears among us, less is more this month.  May will be a different story, but no need to jump the gun.