The New Game

Markets change.  This isn't your 1999-2000 late cycle market, or your 2006-2007 late cycle market.  Markets of the past put a lot of weight on the business cycle, as recessions would lead to stock indices falling into bear markets.  So investors were focused on getting ahead of the business cycle, by selling before the recession, near the peak, and buying during the recession, near the bottom.  That's the old game.  The old pattern.  Front running the business cycle.  Selling stocks when its late cycle and after the Fed has finished its hiking campaign, ahead of the recession. 

The new game has moved 2 steps ahead.  It's not so much about getting out of stocks ahead of the recession.  Its about getting out of stocks just ahead of a big increase in bond yields, even as the economy is hot.  Bond yields have now become more important to the stock market than economic growth.  That is what the 2022 bear market was all about.  Investors assumed that much higher rates would then lead to a recession, ignoring lag effects and fiscal policy.  With no recession in 2023 and SPX going much higher despite higher rates, most forecasters were wrong.  They don't want to be fooled again, so they've given up on their hard landing call, and have tilted towards a soft landing view. 

Higher rates have done little to hurt the US economy, so many assume that it will do little to hurt the economy going forward.  Thus, their consensus view of higher for longer and a soft landing in 2024.  But the fiscal support that was there in spades in 2022 and most of 2023, will be fading in 2024.  Most of the fiscal largesse is going to cash rich buyers of Treasury debt, who have a much higher propensity to save than consume.  There will still be a big deficit, but less stimulative than previous years.  All of this while banks are issuing fewer new loans, slowly choking out growth in future years. 

Investors don't have patience to wait anymore.  What is happening now is assumed to be a good guess for what will happen in 6 months.  After having egg on their face for calling for a recession due to higher rates and monetary tightening, they are now jumping on the lower inflation numbers and calling for a gentle path lower in rates.  Once again, jumping the gun, thinking that lower rates will immediately mean a mild slowdown, with little pain.  With the Fed taking their foot off the break gently, they assume that the economy will have a feathery, soft landing that will keep corporate profits growing and job losses at a minimum.  

In this new game, its all about bond yields.  Investors now try to stay long throughout the easing cycle, even if its during a weak economy, and get out during the start of the rate hiking cycle, just before bond yields surge higher.  Modern day markets are infatuated with liquidity and monetary policy.  Its more important than the business cycle, and the ups and downs of corporate earnings tied to that cycle.  The market would rather have a weak economy with monetary policy getting easier than a strong economy with monetary policy getting tighter.  The simplest way to measure monetary policy is through the change in bond yields.  

The game has changed because of what happened after 2008.  From March 2009 to January 2022, over a span of just over 12 years, SPX went from 666 to 4818.  That is a 623% return, not including dividends, over 12 years, with ZIRP almost through the whole time period.  Investors have been shown one of the biggest divergences between the real economy, where growth has been low, and the stock market indexes, where growth has been high.  That has never happened before. 

Its human nature to always fight the last war.  Recency bias.  The bias among investors is that low rates and QE lead to high stock market returns.  But what market historians forget is that valuations were very low in March 2009, and super high in January 2022.  It was not just ZIRP and QE that created huge returns.  It was the much lower valuations after the GFC that was the potential energy unleashed by recklessly loose monetary policy.  So while investors still have the same playbook, with expectations of great returns when the Fed eases (e.g.: 2019, March 2020 to Dec. 2021), the potential energy is no longer there.  Valuations are very rich.  Household allocations to equities are historically high, and only surpassed by the bubble period in 2021.  In fact, this time, instead of a coiled spring, its a stretched out spring with no potential energy.  

That being said, its not like 2000-2002 or 2007-2008.  This time around, fiscal policy is much looser.  Big budget deficits are mostly going towards enriching the top 10%, who are big financial asset owners.  When you have so much interest income, subsidies, and pork thrown at the rich and lobbying corporations, they won't feel any pressure to hold a fire sale or issue more equity to re-liquify.  Even in a recession.  With such profligate fiscal policy aimed at shooting more dollars at the wealthy, I don't see how you get a 40-50% drop in the stock market.  Anything is possible, but the US is clearly on an inflationary path, and that's incongruent with extended deflationary stock price movements.  We could still get another bear market, but I think it will be like the 2022 bear market, a 20-25% drop without a surge higher in volatility. 

With the current high valuations, returns will be muted, and organic growth and productivity are very low.  All future growth will come from the money printer coming straight from the US Treasury, if the Federal Reserve doesn't play ball.  If the Fed also joins the party, then the dollar will be wrecked.  T-bill fueled deficit spending is essentially fiscal QE, because T-bills are essentially treated like cash.  Most of future real growth will come from under-reported inflation via CPI hedonic/substitution manipulation lower of the inflation rate. 

In this cycle, there will be two local maximums.  One at maximum economic growth, which was in late 2021.  The other local maximum is when the hopes of a soft landing reach their highest, right before the Fed begins its easing cycle.  That's likely to come sometime in the spring of 2024.  The timing will be the hard part, as the Fed will wait till the last minute to reveal that they are on the cusp of cutting rates.  That's going to be the last gasp higher for this bloated stock market, and will likely mark the beginning of another roller coaster ride lower.  

Volatility has made a round trip from 12.50 to over 80 and back down to 12.50 over the last 4 years.  Low volatility environments encourage overreach by investors looking to sell options premium, more leverage use, and slow grinds higher.  Its not a conducive environment for buying puts, even though they are cheap.  This is the kind of market that's best to just avoid if you are a trader.   Don't see much to do here.  Perhaps a small short in bonds and crude oil as potential short term plays.  There is nothing juicy out there.  Laying low in the weeds, like a sniper.  Long periods of boredom which could be  interrupted by short periods of sudden action.

Doublethink

The US stock market is back to Goldilocks pricing as the SPX is now well above 4500 with 10 year yields below 4.5%.  The Fed gave the market an inch, and investors have run with it and taken a mile.  With gradual rate cuts priced in for 2024, investors are breathing a sigh of relief that the worst of the bond bear market is over.  With the high correlation of stocks and bonds over the past 2 years, investors are thinking a bond market that rallies will propel stocks even higher.  In the short term, I agree with consensus.  The tight positive correlation of stocks and bonds should continue for 1-2 more months.  But that should be the end of it as I expect the stock-bond relationship to return to the negative correlation that we experienced for much of the past 2 decades.

Powell is no Volcker.  Those who think Powell will keep rates higher for longer because of his legacy forget one thing:  Powell is no hero.  He's not made of the same stuff as Volcker.  Volcker actually had deep core beliefs about the value of money and keeping inflation in check.  Powell doesn't.  Powell is a politician and a power hungry one at that.  Powell's goals are similar to that of Greenspan's:  take as much credit as possible and deflect as much blame as possible to remain in power.  He wants to be Fed chair for the next decade, and he won't get that opportunity if he torpedoes the stock market and the economy in 2024 by trying to be the next Volcker. 

If he tries to act like a hawk in 2024, he's going to hand the presidency to Trump, where he'll promptly be fired when Fed reappointment choices are made in 2025.  Powell is not that dumb or clueless to put his own head on the chopping block trying to be Mr. Tough Guy.  That's why I am not enamored with trying to pick a top shorting the Mag 7 or NDX.  I'll make a few moves here and there for swing trades, but not for long term holds.  Despite growing overvaluation, its too early to fight it because the Fed is going to be more dovish than people think.  There will be plenty of time to short those egregiously overvalued megacap tech stocks at decent levels in 2024.  The next few months will frustrate bears as the economy deteriorates but the stock market doesn't go down.  

While my short to intermediate term view on the SPX/NDX are fairly neutral, my long term view is getting quite bearish.  It is difficult to keep time frames in separate compartments and not rush to make long term short trades when the market is at levels that are attractive for shorting.  But that's what will be necessary to avoid premature losses fighting the uptrend as the FOMO kicks into an even higher gear. 

We have re-entered the low volatility regime of 2013 to 2019, where the VIX would go down to these very low levels after big rallies.  In those low volatility regimes, you had up moves that grinded higher with shallow pullbacks, until the complacency built up over a couple of months, leading to a sharper pullback that led to a VIX spike to anywhere from 20 to 30.  

Unlike that ZIRP/QE period for most of 2013 to 2019, I don't expect this low volatility regime to last long.  The valuations are too high, bond yields are higher, the fiscal situation is much worse, and the public's allocation to US stocks is near an all-time historic high.  There will be less spending at the state and local level in 2024 as the Covid surpluses are run down.  At the federal level, there will be more taxes collected in 2024 as there were higher cap gains from both higher interest income on bonds and stock market gains in 2023.  The fiscal impulse is negative.  Credit creation has been minimal in 2023, which will feed into weakness in 2024.  The only thing holding this up is the fiscal largesse from huge budget deficits, but most of that money is funneling to the wealthy who are collecting much higher interest income thanks to higher rates on T-bills and T-notes.

These are fertile grounds for a bear market.  At best, they are conditions that lead to sideways to down stock market for several years.  In these times, you can't look too far ahead because there are huge dark clouds way out in the distance.  You have to bide time and stay patient as a bear.  Tops are a process, and take longer than most forecast.  Plus, I am sure that Powell will throw a wrench into the bears' plans with timely dovish actions in 2024.  

Over the past 3 weeks, asset managers have gone from being defensive to chasing the year end rally.  There are some signs of saturation in the megacap tech stocks.  Asset manager net long position in NDX futures is at a 6 year high.  

Hedge fund positioning in the megacap tech is back to all time highs:

 

 

This bifurcation between the megacap tech stocks with the small cap Russell 2000 is eerily similar to what was happening in 1999 as the Nasdaq index powered higher, dragging the SPX higher with it, while the Russell 2000 lagged.  What happened in early 2000 was a dramatic outperformance of small cap stocks over large cap stocks in the first quarter of 2000, getting the crowd excited with strong breadth, which was near the peak of the market.  I could picture a similar situation in early 2024 as the Fed becomes more dovish as jobs numbers come in weaker.  Under that situation, bonds would rally on the weaker economy helping the Russell 2000 more than the Nasdaq 100.  That would be the ideal scenario to fade the crowd getting bulled up as breadth improves.  

For the current market, we are getting close to good risk/reward levels to short long bonds.  Also close to good levels to short is crude oil, as it trades weak vs other risk assets and is in a seasonally weak time period.  It could be a buy the rumor, sell the news event for the OPEC meeting as many are expecting more production cuts.  SPX is still a no touch.  There are a few laggards which I am keeping an eye for shorts, like TSLA, but I'm holding my fire for now. 

Elevator Down

2023 defied the skeptics who were forecasting a recession and bonds got crushed again. Those that played the long side in STIRs and 2 yr futures got hurt the most.  Even though the yield curve steepened, there were more losses on a risk adjusted basis from holding long positions in SOFR and 2 yr Treasury futures than in holding longs in Treasury bond futures.  It was all due to the extreme negative carry of holding leveraged long positions in STIRs when the yield curve is inverted to this extent.  It is costly betting on short end yields going lower.  But if you get the timing right, the move can be explosive, as could be seen in March when the regional banking "crisis" caused 2 year yields to drop 1.25% in less than 10 days.  

The pace of rate hikes and rate cuts are not symmetrical.  Historically, the Fed takes the stairs up when hiking rates, and the elevator down when cutting rates.  This time, with the Fed viewing the current Fed funds rate as being sufficiently restrictive, the bar to cut rates is lower than people think.  Sure, you hear higher for longer being repeated over and over again from the Fed and the parrots in the media.  But following the Fed's forward guidance has been a short cut to the poor house.  I put very little weight on the Fed's insistence that they will keep rates higher for longer until they reach their 2% inflation target.  When the economy goes south, they always put more importance on jobs than inflation.  If you get a weaker jobs market in 2024 and inflation is similar to what it is now, they will cut rates.  If they try to fight the market by not cutting, the SPX will force their hand by panicking lower.  Either way, the market will get what it wants if the jobs market is weak:  rate cuts. 

You have 85 bps of rate cuts priced into SOFR Dec 24 futures.  That is pricing in a small chance of a big drop in rates.  With the current Fed funds rate at 5.33%, even if there is no recession, a mere slowdown in growth would be sufficient to get the Fed to cut at least 50 bps next year.  The Fed hates to price in cuts into their dot plots, because they always want to sound optimistic about the economy, which justifies higher rates.  But even the dot plots have 50 bps of cuts in 2024 as the median forecast.  There is limited downside, lots of upside in SOFR futures for 2024.  In a hard landing scenario, where you have more job losses than expected, the Fed could easily cut rates down to 2.5-3% within 6 months.  That would take SOFR futures to 97.0-97.5.  They are currently trading 95.45. 

There are some that think inflation will remain sticky and keep the Fed from cutting rates until late in 2024 or not all.  Inflation won't be a big issue because inflation is only relevant when its rising strongly.  With the CPI hedonic pricing manipulation, lagged effect of housing which will reflect the much lower rent growth in 2023 in the 2024 numbers, etc., CPI inflation will likely be trending stable to lower for 2024.  Although the secular forces for higher inflation are strong, cyclically, inflation is coming down as you have a slowing economy with weak bank credit/M2 money supply growth.  The lower inflation in 2024 should not last long, as I am sure politicians will pump more stimmies in due time, probably starting in 2025. 

Next year, its going to be all about jobs.  We are getting to a point in the cycle where corporations will have to make a choice about taking high interest rate loans or working with less capital.  If they continue to borrow despite higher rates, then you won't have job losses.  But if they decide its more economical and profitable to run leaner with less capital and less labor, then they will borrow less and start cutting workers.  Interestingly, I saw a recent projection based on an employment model that points to higher unemployment rate over the next several months.  

Based on how weak the Russell 2000 has been, its fairly obvious that small corporations, and especially those that aren't even public, are having their margins squeezed by the higher cost of capital.  Companies aren't welfare institutions.  Their goal is to maximize profits, not create jobs.  If margins are getting squeezed due to higher rates, they will cut costs.  And the biggest cost is labor. 

Even with inflation data coming in hotter than expectations, Powell didn't really talk hawkish.  He was just mealy mouth and seemed like he didn't want to pound the market lower anymore.  I know its popular to say the Fed is clueless, but they are getting reports of the economy slowing.  Its not yet flowing into the economic data which is lagging, but you can see the weakness from how bad the breadth is in the market. 

Its only a matter of time before you see those job cuts start to ramp up.  Its coming.  The nonfarm payrolls number will be the biggest market moving data for 2024.  And unlike 2023, I expect the numbers to come in weaker than consensus for the next several months.  I'm sure the BLS will still be busy counting part time jobs as if they are full time jobs, and calling that jobs growth, but the info on the ground will tell a completely different story.  Labor hoarding is a thing of the past.  You don't continue to hoard labor when you are bleeding cash and interest rates are high. 

With a weakening jobs market, the move in short term rates is straight forward.  But the move in equity markets will be trickier.  I expect a bull steepening move, with short rates going down much more than long rates.  The SPX is more sensitive to long bond yields than short term rates, so a bull steepening is actually not that great for stocks.  And of course the lower consumer spending that comes with a weakening jobs market is going to hurt earnings.  So its 2 forces going against each other:  lower bond yields, which is good, but weaker earnings, which is bad.  So I don't have a strong view on how the SPX will do in 2024.  Going long SOFR and 2 yr futures looks like a much cleaner bet on a weaker economy and an imminent Fed cutting cycle than shorting the SPX.

Last thing to remember is that the Fed is political.  In particular, Powell's job is on the line based on the result of the 2024 election.  It appears Trump is going to be the favorite to win, as a weakening economy and preliminary polls showing him leading Biden in the battleground states give him the edge.  Powell will be motivated to stimulate the economy as much as possible ahead of the 2024 election, trying to keep the stock market as high as possible to help Biden.  If Biden wins, Powell gets re-nominated.  If Trump wins, Powell will be fired.  Powell is no dummy.  He knows this.  The weakening jobs market and stable to lower CPI will give him cover to make aggressive rate cuts in 2024. 

Bottom line, the dominoes are lining up for a big reversal of the rate hiking cycle in 2024. Higher for longer has been repeated for so long by the media and Fed officials, it's become a mantra.  If you repeat a lie for long enough, eventually people believe it.  It means that people aren't positioned for a big move lower in short term rates.  You don't benefit from a big move lower if you are in money market funds or T-bills.  The most effective way to make money in this situation is to make a leveraged long bet in the STIRs market.  With the heavy negative carry in holding leveraged long positions in STIR products, you have to wait for the right timing to put on the trade.  I don't think there is much time left, maybe till the end of this year, to be able to put on longs in STIRs at good levels.  A couple of bad NFP reports should ignite the short end of the yield curve.  With CTAs loaded up short in short term interest rates, and the Street still believing in higher for longer, the setup is ripe.  

SPX is grinding higher despite the bond market's weakness since the horrible 30 year bond auction.  Still not seeing the put/call ratios go down much even with the steady move higher.  From watching CNBC, there is still a wall of worry out there, which is only slowly being climbed.  The Moody's ratings warning on US sovereign debt was only good for a few hours of weakness, and the beach ball bounced up again.  The price action is strong.  The leaders, the Mag 7 are performing.  Monthly opex is this Friday.  The forces pushing this market higher should remain strong until later in the week.  Staying long with a moderate long position. 

US Fiscal Expansion and the Dollar

It sounds absurd, but the immense amount of government spending in the US with huge budget deficits is actually helping the dollar get stronger vs almost all the world's currencies.  Logically, it makes no sense for the value of a nation's currency to go up vs more fiscally sound countries.  Shouldn't more dollars in circulation from all that government pork spending/lower tax revenue make the dollar less valuable?  It can only happen in a world where the US is the reserve currency.  A similar thing happened in the early to mid 1980s when the US government ran big budget deficits, which kept the economy hot, and thus interest rates high.  The USD kept going up during that time, because of interest rate differentials and a growing use of the USD as a reserve currency due to expanding world trade.  This time, its mainly due to interest rate differentials.  There is a belief in the market that the US will be able to keep interest rates higher than all the other developed economies because of its Argentina-style fiscal policy.  If Argentina tries to run this policy, its currency gets crushed and interest rates soar because of the high inflation.  

 Eventually, water finds its level.  Currencies don't permanently have more value when the government decides to go crazy and go on a spending binge on the nation's credit card.  The dollar went sky high and then straight back down in the 1980s.  By the way, there was no recession during this period, as the government was running big deficits at the same time there was a productivity/labor boom as more women entered the labor force and computing power skyrocketing. 

The circumstances between now and the 1980s is totally different.  There is no productivity boom.  And its the opposite when it comes to the labor force, as its not growing, which is inflationary.  It used to be commonly believed that aging demographics was deflationary, mainly due to what happened in Japan.  But Japan had deflation not because of an aging population, but because it had low M2 money supply growth, a trade surplus, keeping its currency strong, and from importing cheap goods from China.  When you have fewer workers, and more retirees that receive government benefits while doing nothing but consuming, that reduces the ratio of labor output to money in circulation.  That's inflationary.  That leads to wage inflation.  That's what's happening in the US.  There is no free lunch from huge fiscal expansion.  It is at the root of almost every high inflation episode in human history.  

Inflation will be a long term problem for the US because there is no political will to cut back on spending, reduce Social Security/Medicare benefits, and to raise taxes.  The mantra is still deficits don't matter.  Ironically, people cared more about the national debt and big budget deficits in the 1980s and even 1990s, when it was a much less serious problem.   Now, when its a big problem, the public just doesn't care.  They want their stimmy checks and government cheese.  At the same time, they complain about inflation.  They can't connect the dots.  So the politicians continue to pander to them and hand out freebies for votes.  

The Fed is effectively the central bank for the world, and its forcing other central banks to follow its course or have its currency devalued.  Japan is a prime example of a country that has decided to go at its own pace, ignoring the Fed's tightening monetary policy, which has resulted in the market crushing the yen.  Europe, Australia, Canada, South Korea, etc. have decided to follow the Fed's tightening to a certain extent, allowing their currencies to depreciate more gradually.  But they pay a price for this.  Those economies are more interest rate sensitive than the US, mainly due to variable and short term fixed rate mortgages being the norm in those countries.  In particular, the other developed economies outside of the US have a larger percentage of bank loans based on LIBOR/SOFR type money market rates, and less long term funding from bond issuance.  Thus, you are seeing a much slower economy in the developed world outside of the US because they decided to follow the Fed.  Either keep interest rate differentials small and really slow down the economy, or face a brutal currency devaluation like Japan. 

The fight against inflation started by the Fed and followed by many other central banks has been more effective at slowing growth and killing inflation overseas than in the US.  European inflation numbers are heading down quickly, and likely to easily go below 2% in 2024, opening the door for Europe to start rate cuts before the US.  Europe is also suffering more from the higher rates as the policy transmission has been much quicker and pervasive.  Germany is already in a recession, and will likely soon be followed by many others in Europe.  There has been and will be less fiscal expansion in Europe and Asia vs the US, which contributes to the growing GDP gap.  

We are now at the point where the monetary policy is starting to be felt in Europe, as the PMIs are very weak and signs point to a very hard landing with Lagarde in the cockpit wearing an owl costume.  Its looking like the US recession people were calling for at the beginning of 2023 is going to happen to Europe at the beginning of 2024.  Remember, about 40% of the S&P 500 revenues come from overseas.  Most of that is from Europe and Asia.  While I don't expect the US economy to do as poorly as many predict in 2024, I do expect the European and Asian economies to be even weaker than consensus.

Last week was all about Yellen trying to play Fed chairman by manipulating the supply of bills and coupons.  Its like rearranging the deck chairs on the Titanic.  There is only so much you can do to "improve" on a horrible situation.  The coupon supply will still be huge and hard to digest at these yields unless you get more weak econ. data and more dovish cooings from Powell and co.  We've seen time and time again when the going gets the tough, the authorities come to the rescue.  Yellen and Powell caving to higher bond yields was the story for last week.  Considering how much hedge funds reduced net equity exposure in October, you had a lot of dry tinder soaked in gasoline waiting for a match to ignite it.  Yellen and Powell were the matches.  

When you see such an explosive move like you did last week, something that blew me away, its usually got some staying power.  I doubt its the start of a huge rally that lasts several months like in March, but more like a 3-4 week rally that takes us to strong resistance near the top of the range, up to around 4450-4500.  

For the bond market, in a rare occurrence, the call options punters were right to bet on a big bounce in TLT.  I don't have much confidence in the long bond sustaining a long rally, but will not short it until you get closer to the August highs in 10 yr yields around 4.30%.  At current levels, I see very little edge in a short term trade.  Overall, still leaning bullish on stocks and neutral on bonds. 

Out of the Cash Bunker

Many were safely huddled into their cash bunker, hunkering down for a wave of bad news.  When investors pre-sell ahead of events, the desperate sellers are gone, and only price sensitive sellers who are bagholding from higher levels are willing to provide supply in the face of a surge of demand for stocks and bonds.  I did not expect a V bottom off that weak Friday close last week.  Its been straight up with almost no dips as you have gone from SPX 4100 to 4250 in nearly a straight line over 3 trading days.  

Hindsight is 20/20, but its now clear that many investors cleared house last week selling off their beloved tech names, as Nasdaq was under the most pressure, and you got technical sellers panic selling as we broke below the much touted SPX 4200 support level.  Reasons to sell were numerous and well known:  

1. Geopolitical risk in the Middle East ahead of the Israel ground invasion into Gaza

2. Bad price action after tech earnings 

3. Technical breakdown below 4200

4. Upcoming QRA where Treasury were expected to announce a huge increase in coupon issuance (Yellen chickened out)

5. Fed meeting where most were expecting a hawkish pause

The above 5 reasons to sell are all behind us and the markets are now 150 points higher leaving behind many investors in the dust.  I, along with many other investors are now begging for a dip to buy, but as is often the case, the market usually doesn't oblige, and keeps going higher until the move is over, after which the dips are toxic and to be avoided. 

Given that the feared events are mostly behind us, there are only 2 left:  AAPL earnings, where expectations are very low, and nonfarm payrolls, which will be anticlimactic just after the QRA and Fed meeting, and will be long forgotten by the time the FOMC meets again.  Plus, it appears the job market has cooled down if ADP and tertiary data points are to be believed.  So the NFP is not going to be a game changer.

Add to that, historically the biggest stock buyback month coming in November and you have a potent mix of underinvested fund managers who will be chasing the indexes looking for a year end rally.  I don't think this rally will make it to year end, but the setup is there for it to make to November opex on November 17, which gives over 2 weeks for this thing to test the upper boundaries of the range, which could be as high as 4450, but more likely to be 4350-4400.  I would not underestimate the short squeeze and chase potential of this stock market at this time of year.  Unfortunately, I am among those in chase mode, but its better to chase early than to chase late.  

The bond market has calmed down and for the time being, the supposed negative catalysts (QRA, Fed meeting) are behind us and it looks like it could rally a little bit more, which would set up a nice shorting opportunity.  Still overall bearish on bonds as there has been too much speculation and talk about bonds being a great buying opportunity when the supply demand fundamentals remain poor and with too many people bearish on the economy.  Too many are expecting a weakening economy to bail them out of bad bond positions.  But the supply/demand situation continues to deteriorate with the Fed doing QT and the Treasury issuing loads of coupon notes/bonds.  Despite the missed call on recession in 2023 by the majority, most of the same people are expecting the global economy to crack at any time under the weight of all these rate hikes.  But that's a tall order.

Higher borrowing costs in the US have less effect when the biggest interest expense for households, their mortgage, is fixed at low rates for the vast majority.  And most of the accumulation of new debt over the past 5 years has come from the government, which doesn't have a borrowing limit.  And politicians are in no way looking to self-impose a limit on their pork spending and handouts.  That is the core problem right now, fiscal profligacy.  The government spending is out of control, and they are unwilling to cut spending or raise taxes to control the deficit.  This is something that a recession doesn't fix, but only exacerbates.  

I doubt you will get that whoosh lower in stocks and a "credit event" that so many bears are waiting for when consumer balance sheets are so strong.  You probably need to keep these higher rates for at least another year or two before you see real cracks starting to form.  And with the Fed and ECB basically done, they will try for that soft landing, loosening financial conditions, keeping credit spreads lower, extending the time that it takes for the higher rates to cause a recession.  

I am bullish for the next 2 weeks, but that's about it.  This is not a strong bull market where you can just hold on to longs and take your time to sell, with prices lingering at the highs.  Its not a bear market or a bull market.  Its a range bound market, and you can't overstay the long or short side over the coming months.  The bears overplayed their hand a bit in October, pushing down the indices low enough where you can get a big short squeeze and chasers to come out of their bunkers to push prices even higher.  But I don't expect it to last as I don't expect the bond market to accommodate such a move higher by not going back down.  

The price action over the past 3 months has clearly shown that this is a not a bull market you can trust.   You can't buy dips recklessly and wait a few weeks to sell higher.  The SPX has spent a lot of time lingering at lower levels, making U bottoms, giving investors a lot of time to buy the lows.  That's not bull market price action.  The drops haven't been steep, and volatility has been contained, so you can't call it a bear market either.  We're range bound, between SPX 4100 to 4600.  

We have another gap up today, on the afterglow of Treasury announcing less than expected coupon issuance, and with FOMC out of the way.  It looks like too much of a move in such a short period of time, so I'm holding off on adding to longs, but it feels like it wants to go much higher over the next 2 weeks.