Crocodile Jaws

The jaws are widening.  SPX keeps going up, and the Russell can't keep up.

The Russell 2000 lagging the SPX is getting egregious.  The market is splitting wider and wider, into a small minority of haves, and a majority of have nots.  We also got 2 more Hindenburg Omens on the Nasdaq in the past week.  That's a total of 5 Hindenburg Omen signals year to date.  When you see a cluster of these Hindenburg Omens show up, its a warning shot that the rally is on borrowed time.  It can pullback right away, or it can pullback in a month, but there is usually a correction within 2 months at the latest.  

Russell 2000/SPX ratio

 

We are also seeing asset managers get more aggressive in adding SPX futures long exposure, as we are now at a 52 week high in asset manager net long positioning.  Dealers also got more short, although not at 52 week lows in positioning.  These are not outright sell signals, as rallies in bull markets can last for several months without a correction.  But this adds to the weight of evidence tilting the odds in favor of a down move over an up move in the next 3 months.

SPX Net Positions of Asset Managers and Dealers

 

Two main things we learned over the last week: 1. Powell is going to try to delay rate cuts into at least May, if not longer 2. AI tech bubble is getting even bigger.  

Powell is getting brainwashed by all the soft landing talk, about how its too early to cut in March from the investment community, and he followed through.  Powell is known for lacking backbone, and he proved it once again, going with what Wall St. wants.  Even when acted like the second coming of Volcker in 2022, it was only because Wall St. was going crazy over inflation and he had to do something about it.  So Powell will let these higher rates deal a bit more punishment to small business.

NVDA is now over 700.  META went up nearly 20% in one day.  The breadth is getting narrower as the haves keep roaring higher, and the have nots just stagnate or drip lower.  One thing you have to realize about big tech stocks like META, GOOG, MSFT, AAPL, AMZN, NVDA, etc. are that they are not a net positive for other companies.  They are a net negative.  Big tech stocks back in the old days used to be drivers of economic growth.  Now they are just rent seekers, parasites trying to push profit margins up as high as possible, seeking the maximum point on the profit curve.   

META raising prices on ads, reducing or completely eliminating exposure for non paying accounts in favor of accounts paying the most ad money to Facebook/Instagram.  META is trying to squeeze out as much ad money from their customers to the crying uncle point, because there are almost no alternatives in internet advertising.  GOOG doing similar things, although not as egregiously as META.  AAPL pushing out the same phones with just slight tweaks and charging more for it because their customers are addicted and/or don't know how to switch to Android.   NVDA selling overpriced graphic cards and trying to bundle it with other services which are also overpriced.  These companies are becoming kings of rent seeking, not innovation.   MSFT and AMZN are basically a data center duopoly, and can push up pricing at will because its such a huge pain to go from outsourcing to making and running your own data center.  

There is such a huge bubble in AI, where the hype is so thick that big tech companies are shooting first (investing in AI) and asking questions later.  They don't have the slightest clue on how they will monetize whatever they develop with AI, but it sounds cool, and Wall St. loves it, so they keep doing it.  NVDA is the main beneficiary of this shoot first mentality, but how long does this last for?  Will companies continue to send billions to NVDA for overpriced chips to build up their AI capabilities when its all just money going down the drain?  I know this sounds like a crazy comparison, but the AI craze reminds me a bit of META going bonkers about the metaverse back in 2020 when people were holed up in their homes.  We know how that ended up.

This bloated Mag 7 led rally is just rotten at the core.  There is no natural economic growth behind it, just some additional deficit spending that puts a few more dollars in the pockets of the rich, the elderly, and lobbying companies.  The current misallocation of capital from nilly willy government spending will haunt future generations.  They all say how the economy is so great because of all the job creation.  But they forget to mention that part-time jobs are where the growth is, and its coming from the poor needing 2 jobs to get by.  Tax withholding data so far this year is showing total wages basically stagnant on a year over year basis.  That data is much more reliable than whatever surveys the BLS uses to measure NFPs.  Yet when we got the big jobs number on Friday, the Wall St. crowd went into a tizzy, celebrating the great unstoppable machine that is the US economy.  Such a great US economy that small cap companies are massively underperforming large cap ones. 

The market is slowly grinding to a top, but the last missing ingredient is the excitement and exuberance you often see at tops.  I see less denial than a week ago, but there is not the typical exuberance that one would expect at market peaks.  Timing cycle patterns for the SPX still give this rally about 4-6 more weeks to run.  So I'm reluctant to get short SPX/NDX until I see more overt signs of a top.  I am still long bonds, and investors are overreacting to the nonfarm payrolls and Powell's reluctance to cut rates anytime soon.  The bond market will rally big not when Powell decides to cut, but when the data and market conditions urges him to cut.  We are not there yet, but with how bubbly the SPX is, I wouldn't be surprised to see a big risk off selloff in stocks coinciding with a strong rally in bonds in the coming months.