Perpetual Boring Machine

The SPX is a perpetual motion machine that goes up in a 30 degree angle on the charts.  The last 5 months would be a textbook example for a book on trend following.  Yet I still plenty of fast money traders reluctant to embrace this rally, to get bullish and excited.  There are still lingering fears about sticky inflation and doubts about how much the Fed can cut in 2024 and beyond.  And the technical traders are still complaining about how there's been no pullback, which makes the uptrend "unhealthy".  You continue to see stubborn short sellers take shots at this market, thinking that a correction is due, and they just keep getting squeezed on the next rally to all time highs.  

Last week, OCC data on buy to open puts vs calls showed higher put activity than the week before even as the market kept going higher.  There were net negative deltas for SPX, SPY, and QQQ options for most of last week, so options traders were reducing long exposure.  Even with the dovish FOMC announcement and the breakout to new all time highs.  There continues to be profit taking and hedging in the options market.  

In a sign that some investors are slowly adding back long exposure, asset managers added to their net long position in SPX and NDX futures last week after reducing exposure for the past two weeks.  Net SPX futures long positions are basically flat since the beginning of the year, despite the SPX having gone up 500+ points during that time frame.  The last time you saw a pattern of the SPX going up so much with asset manager net longs staying flat was from January to May 2021, and July to Dec 2021.  Before that a similar pattern was seen from May 2017 to December 2017. 

We have yet to see overt signs of excess speculation or euphoria in the futures and options market.  This reminds me of the late 2017 market when the volatility died down, the market kept grinding higher, yet you didn't see a lot of speculation or investor excitement.  That market was also led higher by tech stocks.  That late 2017 was characterized by low vol, options selling to collect premiums, and shorting VIX to collect positive carry as the VIX curve was in steep contango.  If things play out like late 2017, then we could have several more weeks of a grind higher into a monster blow off top, like what you saw in January 2018.  It would be mind boggling to see, but it cannot be ruled out considering how little Powell and the Fed seem to care about loose financial conditions or a bubbly stock market. 

So what is the plan for this bubble?  The original plan is in the scrap heap, as a top in late March seems very unlikely based on current conditions.  The rally off the late October low is now 5 months old, so we are now in the danger zone where the market is vulnerable to a correction.  But we've seen longer rallies without any meaningful pullbacks, such as in 2017 and 2021.  In fact, based on current futures positioning, volatility, and investor psychology, those analogs are quite relevant for this market.  If in 2024 does play out similarly to 2017 and 2021, you probably have just one decent correction (5-10%) all year.  That would be a brutal market for a short seller.  Still leaning towards a more bearish picture for 2024 than either 2017 or 2021, but the data doesn't support that view.  

Its easy to fall into the trap of putting on positions based on the market that you want, rather than the market that exists.  I'd be thrilled to put on shorts into an overvalued bubble market that looks to be topping out and make a quick score with little heat.  But that doesn't fit the reality of the situation which is a strong bull market that doesn't give dip buyers any good opportunities to get in.  

Despite the sky high valuations, you haven't seen the excessive optimism that you saw in late 2017/early 2018 and most of 2021.  Even a dovish Powell in the face of higher than expected NFP, CPI, and PPI numbers didn't get investors excited.  You can't force trades as a short seller in a raging bull market.  Being super selective is the only way to survive for those with bearish leanings.  As for longs, playing musical chairs and buying after 5 months of a relentless rally is just not a great risk/reward situation.  Even though I expect SPX and NDX to keep going higher.  Sold the rest of my bond position.  Its boring, but keeping powder dry and waiting for better signals.