Front Running the Acquisition

Its getting close.  With the lower than expected CPI number on Wednesday, we've climbed over the "higher bond yields, lower stocks" wall of worry that lasted all of about 3 trading days!  Of course, after clearing that hurdle, you have higher prices.  

There is one more buy catalyst in the form of a giant, $69 billion all-cash acquisition going through over the weekend, ahead of the Monday open. That is $69 billion of cash handed to Activision shareholders at the open on Monday, a huge chunk which will be immediately re-invested into stocks by passive index funds. 

Of course, the hedge funds won't be letting this go on without doing some front running of buy flows coming from institutions holding Activision, most of whom will immediately put money to work in the stock market next Monday and Tuesday.  With how actively the hedgies front run these big flows (like last month's quarter end bond-stock rebalance), they could pull forward the top towards Friday, even before the acquisition closes. 

You have nirvana for the bulls at the moment:  VIX is going lower, inflation is going down more than expectations, the economy is still resilient, and you have huge acquisition related buy flows in a few trading days.  Last week's mini-scare, where I noticed the chicken littles get beared up because bonds were weak and VIX "spiked" to 17, just reset the meter, delaying the top.  You need complacency and low VIX for the exquisite short setup, not nervousness and Fast Money commentators talking about a pullback. 

There is a small fly in the ointment to this exquisite short setup coming in a few days:  Russell 2000 is outperforming the SPX, and Eurostoxx bounced back strongly in the past few days, also outperforming the SPX.  The risk appetite is still there.  You need to see signs of that fading away before you get that all clear signal to short SPX.  Despite this, if the market keeps rallying into next Monday, it will be so overbought that I will take short positions based purely on price.  But I would not be looking for that long awaited correction until I see the other stock indices show relative weakness to SPX.  However,  we're at levels where you have to have some shorts on just in case of an out of the blue selloff.  Rug pull risk is getting higher and higher, and there is a lot of air underneath.  There isn't much support until you get down towards SPX 4250.  

Probably starting some shorts on SPX and individual names on Friday, with plans on adding more on Monday and Tuesday.  The home run trade is getting closer, but probably will have to wait till August to see that big move lower.