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.