The Other Side of the V

This is not the side that the shorts want to be in.  The other side of the valley.  You can't be greedy when you are shorting the SPX.  It is a monster.  The 2nd half of 2022 was bear bait.  It sucked in the doom and gloom crowd and gave them hope that their long awaited stock market crash was going to happen.  Its done the opposite.  Ever since the regional banking "crisis", its been one huge short squeeze and a chase for performance.  

I got sucked into the banking "crisis" hype in the spring and bought Treasuries, awaiting more regional banks to go under and yields to go lower.  It was a bit painful but I took the loss and moved on.  If you don't take the bitter pills that the market gives out, the market will change them from bitter pills to cyanide pills.  You've got to be a graceful loser in this game to survive.  If you survive long enough, you give yourself a chance to learn.  Our reptile brain psychology isn't developed for investing/trading.  That's why experience is so important to avoid past mistakes.  And to show that primal instincts are counterproductive for trading.  It's one long game so having a losing day/week/month/year doesn't matter.  Its being able to stay in the game that's the most important.

The stock market has done it again.  It has once again stopped the bears right before they were about to celebrate.  Listening to CNBC, Bloomberg, and reading the WSJ, etc.  the consensus view this month was that the SPX would need to test 4200 support by September, before it could resume the uptrend.  It was a bit puzzling to me, as the SPX wasn't even able to get close to 4300 support, much less 4200.  People were looking for a big move when the market was making small moves.  The VIX during this downtrend never got above 20.  It even struggled to stay above 17 for most of August.  The realized vol was meager.  The moves had no energy.  The only way you are going to generate selling is to scare out the longs.  0.5-1% down days just aren't that scary.   And most of the down days in August were in that range.  The most the market went down was 1.4% in early August just as the selloff got started.  After that, most of the down days were less than 1%.  As much as the crowd was ready for a "healthy" correction, the market just refused to give it.  Even my original target of 4300 seemed too ambitious as I saw the selling peter out.  I had to abandon ship on the short side above my target levels before the bulls chased me away.  

When you are shorting a bull market, you not only need to have a price stop but also a time stop.  Once the correction starts, the bears are on the clock and they need to go to work fast.  Most bull markets have brief corrections, normally lasting 1-3 weeks.  but if they do get extended, they last at most 20 trading days.  As of Friday, August 25, we were on trading day 19 of the selloff that started on August 2.  The bears ran out of time, and they didn't do much damage during that time.  Despite my great expectations for an August correction, it was a mediocre selloff and a bit disappointing.  But you have to take what the market gives you, just staying around hoping for sellers to appear because it didn't reach your target is asking for trouble.  In the end, August has proved that the easier side to make money for the rest of 2023 is actually on the long side, not the short side.  

In addition to not being able to cover around 4300-4325 as originally planned, I missed the long entry that I was looking for at those levels.  Strong markets don't give you the price that you want to buy at, and spend very little time at the lows.  You can say that the economy is slowing and the lag effect of rate hikes will eventually bite, but the stock market is brushing off those economic concerns, reminding us that the stock market =/= the economy.  

Of all things, it was a weak JOLTs report that ignited another leg higher in stocks, and squeezed bonds higher.  It could be that the market is sensing that the economy is slowing enough to keep the Fed on the sidelines but strong enough to keep corporate earnings growing with no recession.  In other words, the Goldilocks/soft landing scenario.  Anytime the economy slows down, it can either halt the slow down and maintain lower growth or accelerate the slow down and enter a recession.  In either case, the slow down can be initially interpreted as Goldilocks because the future path is uncertain.  But when stocks are going up, the optimistic view is much more likely to take hold.  That appears to be what is going on at the moment.  And likely to continue for the rest of the year.  Sure you have the restart of student loan repayments, but you also have loads of pork projects and government spending from the infrastructure bill, CHIPs act, inflation reduction act, etc. coming down the pike.  Fiscal spending is not going away, no matter how high interest rates are.  That fiscal largesse can go a long way towards staving off a recession that many people are forecasting for 2024/2025.  And don't forget all that interest income that is being shoveled towards the rich, as cash is yielding over 5%, and most of that is coming straight from the government.

I am not an optimist on the economy, but neither are most macro pundits at this moment. It is clear that China is very weak, and Europe also rapidly weakening.  Everyone knows that.  Yet the European markets hold up well, and the SPX mostly seems unaffected, as it is trading near the highs of June, which is less than 3% away from YTD highs.  I see the high put/call ratios for this month, the drop in bullish sentiment in the investor surveys, and the seasonality bears, those who think that Septembers are usually bad for the market.  It looks like a setup to squeeze shorts into September triple witching opex.  I missed the long, and I'm definitely not shorting this bounce here.  Around SPX 4500, the risk/reward for shorts or longs isn't compelling.  If I had to choose a side, I would be long for the next 2 weeks.  Its looking like it will be an uneventful week and probably nothing to do until you get closer to September triple witching.  If SPX gets back towards 4600 by mid September, I am willing to try another short, although with less size than last time.  

For bonds, its looking likely it will trade in a tight range from 4% 10 yr to 4.4% 10 yr.  Not much opportunity in that market.  What could have been a nice setup for longs into a capitulation never happened, and the bond market just doesn't have the strength to keep going up without a much weaker stock market.  I think the US economy will hold up for the next 6 months, so I don't see any catalyst for a big move higher in bonds.