From Trump Premium to Trump Discount

The US stock market is in transition.  From a raging bull market, to what is likely to be a raging bear market.   From a market that is pricing in a Trump premium, to one that is pricing in a Trump discount.  

The initial euphoria after the Trump election victory is a distant memory.   Hopes for big tax cuts, deregulation, and a repeat of the 2016 to 2020 up move in the stock market was consensus.  It was perhaps the most bullish I've seen investors on US stocks since early 2000.  It doesn't take much to push investors towards a less optimistic view when they are that bulled up.  This time, it wasn't just a small little catalyst, but a big bomb going off with the Liberation Day tariff announcement.  

It was commonly viewed that tariffs were just used as a negotiating tactic to make better trade deals with foreign countries.  But it underestimates the desire for Trump to have the US go back to the old days, where it was one of the manufacturing hubs of the world, with a smaller trade deficit, and when high paying factory jobs were commonplace.  Of course, for those with any kind of insight into the world of manufacturing and production, the US just can't be cost competitive with China unless it jacks up the tariffs several hundred percent, and thus raising prices on almost all goods by huge amounts.  That's just not going to happen.  The market would break far before it even got close to that situation.  And if the market breaks hard enough, next thing you know, Congress will be taking the keys from Trump and taking away his tariff powers.   

This past weekend, Trump caved to Apple and the mega cap tech companies that rely heavily on Chinese outsourcing.  It was Trump showing that he reached his pain threshold, and was feeling the heat.  It also gives China more leverage, as it shows that Trump is a caver, and while crazy, will back down if the stock and bond markets start panicking like they did last week.  Which forced Trump to both delay tariffs by 90 days, and then backtrack even further with more tariff exemptions.  

Of course, Trump didn't want to sound weak, so he tried to talk back his exemption, saying it wasn't an exemption, but a reclassification to another bucket of tariffs which are at a lower rate.  Howard Lutnick came out on the TV circuit to try to tamp down the enthusiasm, saying that tariff exemptions were temporary.  For those that know Lutnick, he is probably the biggest brown noser in the business.  What he's saying is what Trump wants to hear, and what Trump believes.  The stock market doesn't want to believe in that reality, instead hoping that Trump fires Lutnick and Navarro, so the stock market can go higher.  Trump is far closer to Lutnick's view than Bessent's view.  While the market seems to love Scott Bessent, as he tries to placate the market  every chance he gets, its not what Trump's really thinking.  Trump wants tariffs, and wants to keep using the threat of tariffs to exert his Presidential powers.  That's not going away.  

With the gap up today, investors are assuming that Trump has showed his hand, and his mettle, and its a weak hand.   He's clearly not willing to stand up to the stock and bond markets to push his trade agenda when they are having a tantrum.  As much as he wants to reduce trade deficits and bring back manufacturing jobs to the US, he doesn't want to experience the pain and pressure of being responsible for a big decline in stocks, with growing anger from his corporate base.  

While Trump caving means that markets are less worried about big tariffs, he's stubborn and so obsessed with being at the center of the action, that I expect another tariff tantrum just so he can be the center of attention again.  He enjoys being both the arsonist and the firefighter who puts out the fires that he starts.  

Last week's panic move lower, and subsequent huge rally higher on the 90 day tariff delay was a classic waterfall decline, followed by the strong reflexive bounce.  You saw similar action in August 2011 and August 2015.  The current situation is worse than both.  Not only are investors more complacent than back then, they are also much more heavily exposed to equities, making it likely that last week's move lower was a prelude to a new bear market, rather than the starting point for a re-newed bull market.   

The COT data released Friday showed a significant, but not overwhelmingly big reduction in asset manager long positions in SPX.  If you zoom out on a 5 year time frame, the current asset manager net positions in SPX is still on the high side, but no long extreme.  It is still way higher than most of 2022 and 2023.  

SPX Asset Manager Net Position

The commercial net position is still relative neutral, despite the big selloff, and way off the highs that you saw from mid 2022 to late 2023.  

SPX Commercial Net Position

Last week, you saw the stock guys on CNBC start talking about bonds.  They only talk about bonds when something bad is happening in that market.  Once again, we witnessed long term Treasuries fail to provide a hedge to equity market weakness.  Its now the 3rd time in a row, the first in 2022, the second in late 2023, and now where Treasuries sold off hard as equities sold off hard.  Instead of acting as a hedge, long term Treasuries have acted as piece that adds more downside volatility in the portfolio in times of stress.  The golden days of Treasuries providing a positive yielding hedge to equities are long gone.  That's bad news for financial asset investors that could use the diversifying benefits of a negative correlating asset that provides positive returns like bonds did from 1981 to 2020.  That era appears to be over, as we now live in an era of fiscal dominance.  

I believe that for the rest of the year, you will be transitioning to pricing in a Trump discount, a much bigger one than what happened post Liberation Day.  Trump has only a few cards that he can play when trying to push around the stock market.  Its either big tax cuts or big tariffs.  Despite him caving on tariffs over the past few days, he won't want to give up on that card, not when it gives him so much power.  And he loves being the center of the chaos, where he seemingly controls the outcome.  Its a power trip for him.  He's not going to give that up in order to placate investors and CEOs. 

Anecdotally, I still see a lot of investors eager to try to catch the rebound, expecting a continued rally when tariffs are out of the headlines.  You have seen a huge amount of retail dip buying this year, and  that has continued into the waterfall decline.  With the Fed unwilling to bail out Trump on his tariff mess, and with big tax cuts and deregulation a more distant and uncertain catalyst, there doesn't seem to be the fundamental backdrop for a sustained uptrend.  We will see bounces and big bear market rallies, but the damage has been done.  Its looking more like the fall/winter of 2000, the spring of 2022.  The beginning of a bear market.  

I entered a starter short position after the 90 day tariff announcement rally, and remain short.  I am looking to play for a 2/3 retrace of this rebound off the panic lows, expecting more volatile chop in the coming weeks.  Not looking to put on any big positions in this volatile market, especially on the long side.  Playing small ball until I see a fatter pitch.  I do think you will get a magnificent shorting opportunity sometime this summer.  Until then, looking to just stay in the game, and trying to hit singles.   

Crashing

It is full blown panic out there.  VIX will likely open in the 50s.  The market is starting to price in a global recession as the tariff fears take over.  This level of panic is almost as bad as Covid in March 2020, and worse than you saw in August 2015 or August 2011.  You can even bring up October 1987 now that you are getting another vicious Monday premarket gap down.  This a rare situation with only a few precedents.  When you are getting global margin calls with investors overextended in US equities, you cannot rule out even further panic from here.  

If you are long stocks, the main priority is to manage risk and survive the storm.  You will have plenty of opportunities to make back these losses if you can just avoid blowing up.  Blowing up here takes you out of the game when the opportunities are the greatest.  Even if its makes the road to recovery longer and more tedious, you have to trade smaller.  Its not about being a hero anymore.  Its about survival and living to fight another day.  

After a waterfall decline since the Trump tariff announcement, you've gone from nearly 5700 on SPX down to 4800 at the lows in overnight SPX futures in less than 3 trading days!  That's a 15% move!  That is already off a move from 6150 to 5700 over the previous month.  From February highs to the Sunday overnight lows, it has been a 22% down move.  A bear market already in less than 2 months.  This is almost as fast as the Covid drop in 2020, and Black Monday in 1987.  You also had nearly as severe and fast a drop in August 2011, during the European sovereign debt crisis.  This time, bigger picture, this is a more bearish longer term situation.  

In 1987, you had a nearly parabolic SPX rally from the start of the year, so the markets were quite overbought by October.  For mostly technical reasons, and probably because the market needed to consolidate those huge gains, without any ground breaking news, the market crashed in October.  Up till 1987, you had a steady bull market, but nothing that had the kind of overwhelming investor interest or the high equity exposure that you saw in 2000, or even early 2020.  So post crash, the bottom was basically in, but the bounce was relatively weak considering the huge drop.  You only had a 1/3 retrace of the big move lower in the ensuing bounce.  You also had a retest of the lows about 50 days later, which was successful and the uptrend continued.  

In 2011, you had the SPX recovering from the 2010 correction, which was quite deep, and the markets were not very overbought when you started getting market jitters about European sovereign bond yields, in particular, the PIIGS, Portugal, Italy, Ireland, Greece, and Spain.  It came to a head in August as the market completely panicked and fell 15% in less than 2 weeks.  You didn't get an immediate recovery, but had a super choppy range bound trade from the next 2 months, culminating in a bottom in October, which set up a huge rally that lasted 6 months.  

In 2020, the markets were in a steady uptrend after the deep correction in late 2018, as Powell started cutting rates and the markets got more and more bullish on the global economy going into 2020.  The markets were not very overextended, so the Covid crash proved to be a lasting bottom, a generational buying opportunity given the overwhelming Fed and the government response to the pandemic.  2025 is nothing like this.  So I would not expect anything close to this kind of recovery off the crash.  

With these 3 precedents, one would expect there to be a strong bounce once this crash stops.  The question is when the crash stops. Its probably going to happen sometime within the next 36 hours, but a lot of damage is possible during that time.  You can't try to pick bottoms here.  You have to put on positions that can withstand an adverse move and still be left standing.  That's the only way to trade this market.  Using calls to play for a bounce is very risky, and you may not get rewarded after the bounce, considering the sky high options prices, both calls and puts.  Options are overpriced here, and I wouldn't buy calls or puts at these ridiculous levels.  

Usually I will look at the put/call ratios and the COT data to get an idea of how positioning has changed, but the COT data is only as of last Tuesday, which doesn't include the waterfall declines of Thursday and Friday.  Next Friday's COT release will be much more informative to see how dealers, asset managers, and small speculators reacted to the carnage.  We did see huge volumes as expected in puts and calls last Thursday and Friday, but that doesn't tell you much.  The put/call ratios spiked higher, which is expected for big down days.  

Stuck with a small but deeply underwater SPX long.  Just holding on and will look to sell on a bounce and try to play the chop over the coming weeks.  I am looking for the bottom of the new post crash range to be defined in the next 36 hours, and the top of the range to be defined 1-2 weeks from now.  Post crash, you can't expect any persistent trends because the fundamentals and valuations aren't supportive of a sustained rally from here.  There is no Fed coming in with a big bazooka like 2020, or even 2011.  The market will be whiplashed by tariff headlines, which won't lead to sustained moves from here, as there is now a Trump discount in the equity market, which will take a long time to eliminate.  Trump has clearly showed he doesn't care about the stock market, so investors will be less willing to pay up for US stocks.  US exceptionalism is officially over.  

Sturm und Drang

That elevated quickly.  One week ago, almost everyone was expecting tariffs to be limited, and not as bad as initially feared.  I heard too many fast money traders who were expecting a big pension fund quarterly rebalance from bonds to stocks.  But these pension funds are complete idiots.  They know that there are many that try to front run their rebalancing flows.  So they probably spread out their rebalancing over several days, way ahead of the end of the quarter.  It hardly ever seems like these quarterly rebalancing flows have much impact on the market. 

Fast forward one week to now, and 200 SPX handles lower, and the mood is quite different.  No talk of the quarterly rebalance at the end of the quarter, which is today.  Nothing much has changed.  Sure, Trump added some auto tariffs last week and threatened secondary tariffs on Russian oil this weekend because he was "pissed off" at Putin.  But overall, its the same picture.  

It continues to be amateur hour at the White House.  Through the sturm und drang of headlines good and bad, nothing much has changed.  You still have the same unaccomodative fiscal policy with a Powell that is just watching and waiting, probably hoping for Trump to make a bigger fool of himself with all the wax on, wax off on tariffs.  Powell is in no mood to help Trump with loose monetary policy, not with the convenient excuse of tariffs being potentially inflationary.  

Without supportive fiscal and monetary policy, the market is between a rock and a hard place.  That's why you have so little confidence in this market, with a bounce that took 8 trading days to go from low 5500s to high 5700s, but only took 3 trading days (including today) to go back towards the low 5500s.  It seems like it takes twice as much energy and effort to go up than to go down these days.  

The positioning is still bad, just not horribly bad like it was in mid February, before hedge funds started unwinding their big net long exposure in US stocks.  Hedge funds are back to more neutral positioning, but the slower moving institutions and real money are still in the concerned, but not selling yet stage.  And retail is just horribly positioned, basically all in on stocks, thinking that stocks only go up.  They have completely changed their thinking on stocks:  from thinking they are a horrible investment, from 2008 to 2016, to now stocks are always the best investment in 2025.  

If you look at the data from those that track retail investment flows, they have been heavy buyers of stocks over the past 12 months.  In particular, since the Trump election victory in November.  This high net long positioning is also seen in the CFTC COT futures data for SPX futures, showing small speculators at historically high levels.  

The COT data last Friday showed asset managers re-entering their large net long positioning, buying back what they sold in March.  Only to get rug pulled again in the last few trading days.  Its not healthy to see asset managers so eager to put back on such large net longs in this kind of market.  And the result of this offsides positioning is the nasty selloff you had on Friday.  

Throughout the volatility, the bond market has relatively calm.  You are not seeing a huge rally or a flight to quality that you saw in February when the SPX dropped 10% over 3 weeks.  Instead, you are seeing mild negative correlations with stocks and bonds, as bonds rally when stocks selloff, and bonds selloff when stocks rally.  Back in the old days, the 2010s, bonds would rally when stocks sold off, and would often not selloff or even rally when stocks went up.  Those were the golden times for bond investors, as supply demand dynamics were very favorable for bonds, with QE, lower budget deficits, and lower inflation.

With the vicious selling on Friday, spilling over into the overnight market Sunday and into Monday morning, I have started a long SPX position, as the selling has gotten extreme in the short term.  I am not super confident that 5500 will hold, but even if it does, I do expect 5400 to be strong support in the case of true panic this week.  At these levels, it is worth a shot to try to catch a bounce once the uncertainty clears after the tariff announcement on April 2, and after the feared to be bad nonfarm payrolls report on April 4.  Seasonally, we are in a very positive time of year, as April is usually one of the strongest months of the year, although last year didn't play out that way.  I am not a big believer in seasonality, so I don't put much weight on it.   Especially when you have a lot of capital gains taxes that are due April 15, with the big stock gains in 2024.  

Whatever happens in the short term this week, I expect it be to be a volatile range in April, from 5400 to 5700 (bad case scenario), or from 5500 to 5800 (good case scenario).  

From Bull Market to Something Else

We've gotten so used to being in a bull market that it's quite a shock to the system to see a market that drops big, and doesn't recover right away.  This is a different stock market.  Its no longer the market that spends most of the time placidly hanging out near all time highs, giving investors and traders plenty of time to sell near the highs.  This is a market that now gives you a shorter graceful exit window for longs, and a longer graceful exit window for shorts.  

Despite the news flow and the uncertainty around tariffs and US growth, traders still seem to be looking for that bounce off the 10% correction, like they've seen so many times before.  It should have happened convincingly last week, as we were deeply oversold, but the SPX only managed to retrace about 1/3 of the drop off the highs.  

The price action speaks quite loudly.  The US equity market is saturated with longs, many of them who just recently joined the US exceptionalism bandwagon.  Given how quickly the rug has been pulled, many are stuck with losing positions.  I would imagine many of those that chased the momentum names and the Mag 7 are a bit shocked.  Given how much retail and institutions piled into US equities in 2024, and even the first month of 2025, I can't imagine there being much cash on the sidelines looking to buy US stocks.  Not at these valuations with the current macro outlook.  

During this transition phase from bull market to what is probably the beginning of a bear market, you will get opportunities to trade the choppy price action.  Its likely we'll attempt a bigger bounce sometime in April once the dust settles on the Trump tariff policy.  But that will likely be a false dawn as valuations are very high, overall US equity positioning is too high, and fiscal policy is no longer a tailwind.  Add to that a Fed put that is much further out of the money than in the past, providing less investor protection when growth weakens.  

Its not a positive environment for US stocks.  There will be a stronger technical bounce once you get some of the uncertainty eliminated on tariffs.  That's when you can enter longer term short positions to capitalize on a resumption of the downtrend.  It would be surprising to see this market recover from this correction to make new all time highs given the circumstances.  Its looking like 2025 is a year that rhymes with 2000, the year of the dotcom bubble top.  I will be planning trades accordingly to my long term bearish views when the false dawn arrives. 

The COT data for SPX and NDX futures continue to show asset managers reducing their long positions, although now at a much slower pace.  Nothing noteworthy as the movement from March 11 to March 18 covering the futures positioning data only saw a small bounce in the SPX.  Based on the DBMF ETF positioning changes YTD, it is clear that they have completely sold out of their SPX longs, and transferred them to international developed markets (European equities) longs.  The CTAs are now slightly on the short side of the SPX, which is a big change. Its one of the few positives for those looking for a bounce.  The CTAs are often wrong on their index futures bets.   

We are getting some optimism this morning based on some news that tariffs will be less broad than expected.  With less than 2 weeks till the April 2 announcement of Trump's tariffs, there will be more headlines shaking the market in the coming days.  Do not get caught up being too bullish or bearish following any of these news related moves.  

Got out of the small SPX long late last week, and now on the sidelines just waiting.  If we get a bit more of a bounce, may enter a short position.  If we drop towards the 5400-5500 area with some panic, will be looking to buy that dip.  

Bubble has Popped

The bubble has popped sooner than expected.  Unlike 2000, when the bubble extended for several months after rabid enthusiasm had set in, this time, it didn't even last 2 months past the Trump election win before the indices started to falter.  

The market can give you the clues but you have to be willing to put money on the line if you want to cash in.  You have to risk being a bit early if you want to be sure that you catch the reversal.  The violent gap downs and volatile intraday price action were clues that the market was unstable at those high prices from mid December to early February.  But given the resilience of the market in late January to mid February, I expected a bit more of a thrust higher above previous highs.  To suck in more bulls.  But alas, the market was already too saturated with bulls and there were no more suckers looking to chase all time highs.  Instead, we got a very minor break of previous all time highs on February 19, and have been going down in a straight line since.  

The price action of the past 3 weeks clearly shows that investors are overinvested in US stocks, and underinvested in international stocks.  This is the first time since 2008 when you've seen such lopsided underperformance by US stock indices versus European and Asian indices.  That is a huge signal, because almost everyone has bought into the US exceptionalism theme.  That has led to the biggest ever household allocation to US stocks in history.  

After the carnage of the past 3 weeks, there are many now looking for a bounce off these oversold levels.  We got the beginning of that on Friday, and Nasdaq has been outperforming the SPX for the past 2 days.  It looks as if there is decent support at the the 5500 level, with March opex coming up soon.  In the past, there used to be a strong tendency to rally into the big quarterly options expirations of March, June, September, and December.  That tendency has disappeared in recent years, perhaps due to the prevalence of options speculation (especially calls) that is unprecedented in stock market history.  

You add to that the negative fiscal impulse of tariffs and DOGE.  Its not a pretty picture for US growth for the next several months.  You can already see the negativity from a weak stock market show up in the consumer confidence numbers.  The US is the most financialized economy in the world.  It has the greatest concentration of wealth tied to equities vs other assets.  The wealth effect is real.  This is just the appetizer.  The negative wealth effect of a bear market starting in 2025 would be even bigger than the one felt in the bear market starting in 2000.  

What can be assured is that this week's moves will be exacerbated by the triple witching opex forces at work.  They were super bearish on the downside for December.  This time, I doubt that repeats due to the already big down move that's happened since February monthly opex.  My crystal ball, which has been foggy over the past few weeks, would think that we get a choppy up and down price action, that ultimately goes higher into Friday morning.  But my conviction on the bull side has gone down with the continuous weak price action, and yet, you get surveys like this:

Sure, you can say that the big Friday rally was the reason for the sudden optimism.  And in an uptrend, the optimism is usually a sign that the market will keep going higher.  But we're not in an uptrend anymore.  That's a really lopsided ratio of short term bulls to bears, which is contrary to the price action of the past 3 weeks.  

Still holding a very small long SPX position, and looking to add on a dip this week.  Not looking for a huge bounce, but a move towards 5800 is possible within the next month.  On the downside, 5400 is about as low as I think this market goes before you get a multiweek move higher.  

Chopping Down

There has been a change in character of this market, which investors are just beginning to get adjusted to.  They are not completely adjusted, because if they were, you wouldn't see so much intraday volatility.  You are getting a correction, but the correction is much choppier than ones you saw in the past.  You are getting many more "fake" V bottoms, where you get huge intraday reversals, only to see them fade the next day.  You don't even get a day's follow through.  The sellers are already eager to dump the next day, and the V bottom chasers end up with longs at bad prices.  

The 2024 market was a forgiving market for the longs.  The dips didn't last long, and whatever pain came was short and brief.  It rewarded the stubborn bulls who refused to get scared and shaken out of their long positions.  This is what bulls have been conditioned for during the last 18 months.  But this market isn't acting like 2024.  Its not giving you much time to sell the highs, and its giving you much more time to sell the lows.

This is characteristic of a market where long positioning is saturated, and the sentiment has shifted from overly optimistic, to more realistic.  No matter what some of the sentiment surveys say, you are not at a pessimistic extreme.  You still see bulls eager to call bottom and chase V moves higher, leading to huge intraday rallies that fade hard the next day.  Investors don't suddenly adjust their positioning from risk on to risk off.  When you get such extreme long positioning in US stocks like you did late last year, it takes several months for investors to pare down their positions to match their market views.  During that process, you get lots of volatility as eager sellers are not met by such eager buyers.  But the memories of 2024 keep the longs from completely throwing in the towel, thus the frequent intraday rallies that end up failing.

Its the lingering hope that the market has hit bottom, and that it will make a V move higher back to the highs, like it always did in 2024, that keeps the buyers chasing these intraday rallies.  It keeps the market from getting washed out, as the hope keeps the bulls from throwing in the towel.  

To trade this market has required some adjustments.  You can't be eager to buy the dip now.  Its a mistake I made going in too early on the first dip lower in late February, which was just the start of this correction.  I overestimated the strength of this market, thinking SPX 5800 would be strong support and unlikely to be broken.  The ease with which it broke 5800 and then stayed under that level for most of last week was surprising.  

In trading, everyone comes in with a plan.  Of course, most expect their plan to be profitable, so they spend much more time figuring out what to do if the market goes in their favor rather than against them.  

If the market behaves differently than expected, you can choose to be stubborn or reactive.  There are pros and cons for both choices.  If you choose to be stubborn, you will not overreact during short term drops and fake outs, avoiding losses.  The downside of this is if the moves are not fake outs and keep going.  Then you have to eat bigger and bigger losses.  

If you choose to be reactive to market price action and reduce risk when the market behaves differently than expected, you will be selling during weakness and get stopped out, but limit losses and avoid big down moves.  The downside of this is the moves are just temporary overshoots and reverse immediately, giving you no opportunity to re-enter longs at lower prices.  

This market has favored longs that are reactive when it comes to losses, rewarding those that cut their losses rather than those that stay long.  Of course, being reactive to market dips was the wrong approach in 2024.  The market now is punishing stubborn longs that think a V bottom is just around the corner, like all those other times in 2024.  Its classic market psychology at work.  The market trades one way for a long time and then changes behavior, punishing those that don't adjust to the new market.  We are no longer in the raging bull market phase.  We are in a transition from raging bull to a range bound, but volatile market.   

I still believe that this market is range bound, the range just happened to be bigger than expected.  The initial view that we'd be trading mostly between 5850 and 6150 was wrong, as I thought the Trump optimism would last longer than it did.  Now many investors are realizing that Trump's policies are not growth friendly.  Reducing the federal budget, reducing immigration, and using tariffs is growth unfriendly.  Tax cuts and deregulation are still vague, far into the future catalysts that no one can quantify.  Its likely being overhyped by the optimists.  Regulations aren't holding back the US economy.  Tax cuts and deregulation are just your typical, parroted Wall St. talking point that was used to get investors bulled up.  

The COT data for the week ending Tuesday, March 4, which was a big down week but showed limited selling from asset managers.  The notable moves were leveraged funds adding a lot of longs, while dealers added a lot of shorts.  It looks as if hedge funds were buying the dip in SPX futures.  And those recent dip buys are deep in the red.  

As for the options market, you did see some decent volumes, but the put buying wasn't as much as one would expect given the extreme weakness.  The ISEE index of calls to puts went lower last week, but its not at extremes, and comparable to levels when you had milder dips in September/October 2024.  There  are very few signs of panic or fear in the options market.  

The bond market continued its rally last week, and is now looking like a legitimate risk-off hedge for equities.  I missed the dip buying opportunity in bonds last week on the equity bounce, expecting a stronger SPX bounce that never came.  I think you are looking at the start of a bull market for bonds which could last for the next couple of years as US growth disappoints and the SPX enters a bear market.  I will be keeping an eye on how 10 year yields trade when you get the next up move off this correction.  If you get to anywhere around 4.50%, that would be a good spot to get long Treasuries.  

Currently holding a very small long, looking to only add on weakness and a test of Friday's lows or a move towards 5625-5650.  I do expect a bounce this week, but it shouldn't last more than a few days, and then more chop lower.  I won't be looking for a V bottom, so will be taking profits on any moves higher towards 5850-5900 area.  

Jack in the Box

Retail investors are Jack.  The market is the box.  Its been a Jack in the Box market.  Retail got rugged hard last week.  Its been a brutal 10 days for retail investors, as the momentum crowd favorites got crushed and massively underperformed a weak market.  Unlike the January selloff where the selling in momentum and retail favorites was tame, this time the selloff was led by the momentum names.

This market is volatile, but directionless.  Its in a hurry to get to nowhere.  Its stuck in a big box. From Friday opex till last Friday, over a span of 1 week, the SPX dropped 290 points, almost 5% in a week.  That is fairly intense volatility, something unusual for a market that's lingering around all time highs.  It points to a market that is not normal, something where the past patterns are less common.  This market is giving you much less time to sell the highs than the markets you saw in 2023 and 2024.  Its been an adjustment period where I've been too patient waiting for the right spot to short, and missing the entries because they don't last for long.  

The last sweet spot entry was after the FOMC minutes on Wednesday, Feb. 19, when the SPX went above 6140.  It stayed there for about an hour and never sniffed those levels again.  Its a brutal market for those buying strength and expecting breakouts to keep going higher, like they did last year.  The character of the market has changed, and its our job to adjust to the new patterns.  

It seems pretty clear now that we are stuck in a range, although it can feel scary.  The movements are violent from the upper end to the lower end.  Roughly, we can define the current range as being between 5800 and 6150.  Eventually, more and more market participants will catch on to this being a range bound market.  When they show less fear and start getting bolder and nonchalant at the bottom of the range, that's when you need to get more concerned.  But we're not there yet, as I heard quite a few calls for a move towards 5600 and 5700 on CNBC as the market was hurtling lower last week.  We are still getting the fear at the bottom of the range, which means investors are not really believing that we're stuck in a box.  

The ISEE index of calls to puts opened shows that we reached mid January levels of put buying.  Investors started buying more put protection last week, and the volumes were above average.  We've rung out most of the post Trump election optimism from this market.  It makes it less likely that we get the rapid, deep down moves over the coming weeks.  With more put protection bought, there is less need to panic sell weakness.  

The COT data for SPX futures shows asset managers maintaining stable, but a bit lower net long positions than the 2nd half of 2024.  Bigger picture, its still a large net long position, but not egregiously so.  This is a similar pattern to what you saw in late 2021 as the asset managers didn't increase their net long position much even on rallies, and reduced them aggressively on selloffs.  This is late bull market positioning behavior.  

What's been interesting about the selloff last week was the immense strength in bonds, something that we haven't seen since last summer, as the market pulled back from mid July to early August.  Last year, the market was trying to front run rate cuts.   This time, its a bit of a growth scare and fears of fiscal contraction and tariffs reducing growth.  The expectations for lots of rate cuts are not there, which means this bond rally has been more about pure demand and under positioning by institutions.  I expect the bond market to continue to show strength throughout the year.  Although after this recently rally, I would wait to see if stocks bounce back up some more before looking to get long.  

Last week, I added to my small SPX long to build it up to a medium sized position.  Last Friday, we got the fear of being long into the weekend type of haphazard selling into mid day, and then the short squeeze into the close.  I usually dismiss these late Friday rallies as just short covering, but with my belief that this market is range bound, and we were in the lower end of the range, I will take more meaning from that Friday close.  It signals that sellers are mostly done, and we're likely to try to test the top end of the range sometime in the first half of March.  Remain long and will hold for at least a few more days.  

Entering Stall Speed

This high flying airplane of my market is showing signs of entering stall speed.  Momentum is a self perpetuating phenomena where strength induces more fund inflows and more strength, until you reach a saturation point.  At that saturation point, the inflows are not sufficient to maintain the high altitude, and the stocks get dumped, with weakness feeding further weakness.  During this process, there are some wild down moves that match the steepness of the up moves. 

Reddit WSB favorites PLTR and HIMS, along with many other momentum favorites made spectacular tops this week.  It is not coincidence that this happened during an options expiration week.  Some of the other large cap momentum blowoff tops include RDDT, CVNA, NET, and WMT. WMT even became a momentum favorite this year.  Its valuation reached overvalued extremes that reminded me of the way it traded during 2000, in the midst of the dotcom bubble.  

What is more meaningful about this blowoff top is that most of them are not just from one sector being dumped.  These stocks cover everything from internet, retail, AI/government related, and autos.  

These momentum stocks are the fuel that feeds the animal spirits in the stock market.  When these momentum stocks are strong, it signals a robust overall stock market.  When these momentum stocks make blowoff tops, then the overall stock market is showing its weakness underneath the surface.  This weakness will not manifest into a downtrend right away.  The momentum stocks act as a canary in the coal mine, sending out warning signs of an impending end to uptrend.  

The longer the trend that these momentum stocks have enjoyed, the longer it takes for these warning signs to show up in sustained SPX weakness.  Since we've only recently witnessed a big top in these momentum names, there is a still time for the weakness to spread to the overall market.  Those with long term bullish views will view it as a healthy consolidation of the uptrend.  Those with long term bearish views will view it as a broad, choppy top that will lead to a bear market.  

I lean towards the long term bearish view, based on bubble valuations, bubble mentality (greater fool theory), and increasingly bearish macro headwinds.  These bearish macro headwinds involve lower fiscal deficits (tariffs, DOGE, and big capital gains taxes coming due this April) and tighter immigration policy.  The stubbornly high long term bond yields also add to this, as it makes home buying more expensive, reducing housing demand.  This is all happening as investors are still quite bullish about the US economy, thinking Trump's tax cut and deregulation promises will outweigh the above headwinds.  But these tax cuts and deregulation measures are still very abstract and would mostly just be a maintenance of a low tax regime.  US taxes are low for developed world standards.  This doesn't match the high government spending and interest expenses, thus you have huge fiscal deficits that are much higher than in Europe and Asia.  That was one of the factors in US exceptionalism, which has been conveniently ignored to  cheerlead the stock market.  

Even just a small downshift towards less government spending from minor cuts from DOGE and more taxes from tariffs is enough to put this high flying plane into stall speed.  The market started to sniff out this growing fiscal contraction with a Fed on the sidelines, prompting a recent rarity:  rising bond prices and dropping stock prices.  This happens when the market starts to place less importance on inflation and more importance on growth.  If this is the new regime, which looks likely, then you will see more negative correlation between stocks and bonds.  

The latest COT data shows a continuation of the same pattern of reluctant bullishness, as elevated asset manager long positioning doesn't increase much even during market rallies.  It appears we are entering a similar pattern as late 2021, as asset managers pare back extreme long positioning, even into market strength.  In hindsight, we now know that we reached the saturation point for asset manager positioning in late 2024.  This, along with the recent reversal in a number of momentum stocks, and the choppy and high intraday vol environment are reminiscent of early 2000 and late 2021.  History doesn't repeat, but it does rhyme.  

We got a nasty selloff on no news on Friday.  Those are the more bearish type of selloffs.  I would give it more meaning if it didn't happen on opex Friday.  But its just another sign that this market is now going to be a two way market, with both vicious rallies and vicious selloffs.  I did enter into a small SPX long position into the afternoon weakness (a bit early) on Friday, but I will be conservative and wait for more weakness to add to the position.  Playing small ball in this environment, until I see bigger opportunities.  Will now be looking to be more aggressive and earlier in entering short positions as the probability of extended rallies goes down in this chop environment.  

Iron Chin

This stock market keeps taking big blows and keeps on moving forward like a zombie.  Its got an iron chin.  You have to be impressed by the price action relative to the news flow.  

We came into last week with worries about reciprocal tariffs, which Trump warned about on Friday, Feb. 7, leading to a weak close.  That little news bomb took the SPX down about 1% in 2 hours.  Then the market grinded higher to recover most of those losses into the CPI number on Wednesday, which came in hot. The CPI  took the SPX down about 1% over a few minutes.  Then the market grinded higher to recover all those losses and managed to put on gains after the reciprocal tariffs announcement was more bark than bite.  

If you are selling stocks based on tariff fears, you are selling low.  There is no edge in chasing news based moves unless its for quick daytrades.  Those taking on positional shorts because of these little bits of "scary" news are going to be punished over the long run.  You always have to consider the price action relative to the news, and whether you are coming off of a purge or a pullback, or coming off of a period of complacency.  The pullback from mid December to mid January was lengthy enough for a strong uptrend to reset positioning to more neutral levels.  That gave the market some "immunity" to the bad news wave that you had over the past few weeks, starting with DeepSeek, and more recently, the tariffs.  

At the current juncture, despite being at all time highs, it doesn't feel like there is much excitement out there.  That make its tricky to try to time a short here.  Intuitively, it feels like a bear trap to short strength into a string of bad news that came out: DeepSeek, tariffs, and hotter inflation.  The resilience of this stock market doesn't make me super bullish.  It does make me reluctant to put on shorts though.  Cash seems like a good place to be right now, waiting for the bulls to push the market higher to set up a short opportunity.  

The COT data as of February 11 showed very little movement among asset managers.  They still are not rebuilding their long positioning that was rapidly reduced in December and January.  Their positioning is still a large net long, but not extreme like it was late last year.  Not much to read into at current levels.  Also, leveraged funds still have a large net short position, which usually needs to start going down to more neutral levels to get a steady downtrend going.  

The market feels like its quieting down from the spastic sharp down moves and steady grind higher recoveries over the past 2 weeks.  I expect the SPX volatility to continue to contract as the range trade narrows, leading to an explosion of volatility later in the year.  We are coiling up for a big move down sometime in the next 6 months.  You can sense that being long US stocks is becoming more of a sucker's game, as most investors now admit that stocks are overvalued, but they have to keep up with the indexes to keep their jobs, so they have to stay fully invested.  But you can feel their reluctance investing at these levels.  Its similar to what you saw in the middle of 2018.  The market did grind higher into the fall, and then went into a vicious downtrend that ended with a capitulation into year end.  I can picture a similar move playing out this year.  

We got an interesting move in bonds last week, as the CPI torpedoed bonds all in one day, but it quickly recovered those losses.  I hate to compare this bond market to those pre-2020, when inflation was never a true concern.  But it has the feel of 2014, when the bond market would shake off hot jobs numbers, regaining losses from strong economic news quite quickly.  It also happened to be the year that crude oil was slowly weakening.  The lack of strength in WTI crude is a positive sign for bonds, as you can't get people really scared about inflation until you see oil prices really go higher.  That's not happening here.  

Still maintain the small long SPX position, but I'll look to start selling this week.  The risk/reward seems about even here.  Short term neutral to slightly bullish.  Long term bearish.  

Being Desperate

“Most people overestimate what they can achieve in a year and underestimate what they can achieve in ten years.” - Bill Gates, Tony Robbins,.....

The market will seek out your weaknesses, find them, and test them.  One of those weaknesses is desperation.  Especially for full time traders.  When you have to make money, then you are trading from a weakened position.  Its easier to succeed when you want to make money, but don't need to make money.  

I've noticed that I've usually traded better when I've been winning than when I've been losing.  Its because losses affect your mindset differently than wins.  After losses, most traders, including myself, want to recover those losses quickly to get rid of the negative emotions that come from losing.  The bigger the loss, the stronger the urge to recover losses quickly.  This means trading from a desperate position, which is a position of weakness.  

After wins, most traders are not in a hurry to get into the next trade, because they already have a feeling of satisfaction from recent wins.  The bigger the wins, the stronger the feeling of satisfaction and the less urge to rush into the next trade.  This is trading from a position of strength, with no desperation.  

When you are not desperate, you don't take marginal or negative EV trades.  You don't sacrifice the optionality that cash provides by being stuck in those mediocre to bad trades.  When you have free cash, you have the option to take advantage of good opportunities that come along.  Just by not being a desperate trader, you can take advantage of more good opportunities because you aren't stuck in mediocre to bad trades.  

This is why I've noticed a streakiness to the results of not only my trading, but other peoples' trading.  The psychological aspect of this game is extremely important.  But since its so vague, and hard to quantify, it is underestimated and often ignored.  When I first started in this business, I gave little thought to psychology and emotions and mind control.  Its only after several years of experience and observation that you realize how psychology is such a huge part of the game.  

Becoming a full time trader is hard because of the need to make money.  Trying to make money in the markets is similar to trying to get a loan at the bank.  When you have enough money and don't need to make money, then it becomes easier to make money.  When you try to get a loan at the bank, its much easier to get a loan when you have collateral, i.e. real estate, to put up to get a loan.  If you have nothing, the bank doesn't want to lend to you.  If you have a lot, the bank will want to lend to you.  

If you really need to make money from trading, its hard to not  be desperate.  When you have lots of expenses, and no income except from trading, its nearly impossible to trick your mind into thinking from a position of strength when you are in a position of weakness.  Its why those that do make it as full time traders are mostly young traders, who don't have families, who have fewer expenses, and less to lose when blowing up.  The nothing to lose mentality actually can reduce the desperation of having to win.  And if you add risk management to that, then you have a chance to make it in the long run.  

Nothing noteworthy in the COT data or the put/call ratios last week.  Asset managers made small reductions in net long positions in index futures, and dealers reduced some of their net short positions.  Bond yields have stabilized around 4.5%, which is good news for risk asset holders.  It looks like we got the fear based bottom in both bonds and stocks in January after the hotter than expected NFP number along with the pre Trump inauguration jitters on tariffs.  

Last week began with tariff news at the start of the week, and ended with tariff news at the end of the weak.  These headlines ignite 1-2% moves, but they don't last.  The more often you get these headlines, and the more predictable they become, the less they will move the markets.  It appears a lot of selling was front run on Friday afternoon ahead of the potential announcement of reciprocal tariffs.  If tariffs are the worsㅅ thing that can happen to this market, then that's not really bad news.  Tariffs are easily taken off, and their effects are overrated.  Especially if you get all those tax cuts that Trump is looking for.  

Still holding a small long position, not looking to make any big moves here, in this narrowing range.  Although if I didn't have any position, would be taking a long position on any tariff fear induced dips this week.   

Lowering Expectations

Once again, the market gets kneecapped by news, this time, something that was kind of expected.  Everyone knew that tariffs were coming, just not sure when and how much.  The reaction to the news is a bit surprising, since this wasn't completely unexpected.  It shows you how much optimism was priced into the market after the Trump win, as everyone was talking about the good things coming, and not much about the potential bad things coming.   We are still working that off, with these violent gap down moves, showing you how bad it is to be long stocks when there is so much enthusiasm.  

Its been 1.5 months since the beginning of the real shake out, starting from the December FOMC meeting.  Usually, these shake outs and pullbacks last about a month.  But this one has been so choppy with big moves in both directions, that its not a typical pullback.  Its more of an off/on selloff that would normally be completed in less than a month, but with the intermittent face ripper rallies, you've not been able to get a real purge of the saturated positioning that was present a couple of months ago.  

With this latest piece of "bad" news, we are getting closer to the end of this choppy correction.  This is not a stable condition for the market, to have these huge gap downs and then equally huge face ripper rallies right afterwards.  Eventually you either blast higher and resume the uptrend, or the market keeps going lower, really flushing out the weak hands and scaring investors.  

From an economic viewpoint, there should still be an initial boost from the Trump win with more investment spending and looser credit and regulatory conditions at the banks in the next few months.  It makes it likely that you will have at least a bounce from these selloffs, or more likely, a typical resumption of the uptrend after a corrective period.  

Tariffs are overrated and overhyped.  Because they are unpopular, they are unlikely to stay on for the long term.  Most of the US population doesn't like higher prices for imported goods.  Most of the US population won't benefit from any trade protection coming from tariffs.  And most of the US population doesn't like lower stock prices that are coming from tariffs.  Since most of these imported goods can't be substituted by goods produced in the US, it just ends up being a tax on consumption and production.  From past history, Trump is likely to declare victory over his tariff strategy after he gets some token concessions.  

Its actually a better thing for the market to have the tariffs come out from the beginning, in order to lower expectations for the coming quarters for economic growth.  The expectations were a bit too lofty going into 2025, with irrational expectations of strong growth coming from de-regulation and future tax cuts, with very little concrete evidence.  Now investors are slowly coming back to reality, with the DeepSeek news and now tariffs driving away a lot of that unbridled enthusiasm, and keeping the trend on a more sustainable path.  

The string of big gap downs and bad news is actually a bad thing for the bears in the short to intermediate term.  There was a risk that if you didn't get any bad news, and the market kept going higher after the bottom in mid January, you could have had a nasty blowoff top made in February/March, leading to a much bigger correction.  Since the SPX has been contained below 6125 on the rallies, it means that the selloffs don't have as much fuel, and won't be as long lasting.  You just haven't had enough time for the weak hands to build up big long positions again, like they did in early December.  

The COT data as of last Tuesday, didn't show any big changes in positioning, with asset managers adding a small amount to their net long positions.  Looking at the ISEE index, you can see that the enthusiasm has been pared back to more normal levels of call buying.  

The excessive optimism has been pared down and you are back to more neutral levels of sentiment among investors.  You can see that in the NAAIM exposure survey.

The bond market has stabilized closer to 4.50% after selling off to 4.80% 10 year yields.  This should help stocks from going down much further.  The bond market doesn't seem to be fazed by tariffs, which shows that speculative positioning is much lighter and you probably have CTAs short bonds here, which adds potential short covering fuel for bonds if inflation isn't as sticky as many expect for 2025.  

Still holding the small long position from last Monday, I may add to the position if there is a further selloff from the current levels in the coming days.  Leaning bullish, but not a great risk/reward so keeping positions small.  

DeepSeek News Bomb

Will DeepSeek be the straw that broke the camel's back?  We'll find out within the next few weeks, but my view is that this is another hyped up story that ends up being ignored in a couple of weeks.  Most investors think that AI is the next big thing.  They think it will be a game changer that makes a big chunk of human labor obsolete and drive huge productivity gains.  In theory, if you combine AI with advanced robotics, that could happen.  If it was so easy and obvious, why hasn't it been done already?  Robots have been around for a long time.  So has AI.  Faster GPUs are what's making this all possible?  Or even DeepSeek?  

I admit that I am skeptical about lots of new techologies that get hyped up.  One that I was definitely not skeptical about from the start was the internet.  It was obvious from the get go how huge it would be.  Most could feel the difference right away.  There was no abstract theories or views of the future that was needed to get people to believe.  Just being able to send email and browse the internet with Netscape was enough to get people to see the immense possibilities.  

With AI, you have to be believe in the unknowable future, an abstract, theoretical view of how AI will change people's lives.  Its mostly theory, currently with limited practical uses that are expansive.  ChatGPT and making AI generated videos is nice, but its not a sweeping technology that changes the way people communicate and get information.  They talk about all the productivity enhancements from AI, but if so, why aren't more people getting fired from the big tech companies that are getting this great AI productivity boost?  Higher productivity means less workers needed.  

The reaction to the news is surprising, given how much bonds are up.  It definitely feels like a lot of weak hands got long last week after the inauguration, so this is probably some stops getting hit, as well some dealer delta hedging overnight as IV goes up as prices go down.  Moves like this does show how much more fragile and dangerous this market.  When you have so much money that's flowed into US stocks, many by late to the party, less informed weaker hands, you can get these big gyrations out of the blue.  It speaks to the saturation of long positioning among investors.  There is no other way to explain these sudden drops in the market, like what you saw at the last FOMC meeting, and now again overnight on DeepSeek fears.  

There were no big changes in the COT data as of Tuesday, January 21.  Asset managers have aggressively reduced net longs, but from a historical view, its still a big net long position.  The pullback from mid December to mid January did purge some overextended long positioning, so the market now is not as dangerous as it was in December.  But big picture, you will get these big one day drops more often going forward because of the higher valuations.  

Based on the price action you saw overnight, it is definitely weaker than it should be given the news.  So whenever I see a huge move like this that doesn't make sense, I prefer to wait and let the dust settle before making any big moves.  I do believe its a shakeout type of move that will eventually reverse, so its at least worth taking a small position looking for a bounce.  I put on a small long in the overnight session, looking to hold for several days.  If we didn't have such a big up move over the past 2 weeks, I would be considering a bigger position.  But we're not at great levels for longs, so only going with a small position.  

Easy E Market

US equity investors have had a wonderful ride over the past 16 years.  You can really say that there was only one real bear market, the one from January to October of 2022.  The Covid crash went down over 30% in February and March 2020, but lasted less than 2 months from top to bottom.  And it basically went straight up from the bottom.  That's not a real bear market.  So one real bear market over 16 years, which lasted just 9 months, and then another rocket ride higher immediately afterwards in 2023 and 2024, going up over 70% in 2 years.  

This market is straight outta Compton, its an Easy E market.  Being a passive investor in stocks, just buying index funds, shouldn't be this easy.  Stock investing was never meant to be this painless.  The reason you get higher returns in equities over bonds is because there is more risk, due to be being lower in the capital structure, and thus more volatility.  But it seems as if bonds are now more risky than stocks!  

These kind of unusual, one way markets, with valuations reaching historical extremes, have not had happy endings.  1929. 1973. 2000.  2021.  All of those market tops (except 2021, which was a plain liquidity and stimmy bubble) were characterized by a select few group of large cap stocks leading the market higher.  In 2024, the small and mid cap stocks continued to lag the large cap names, and for good reason.  The earnings growth has been concentrated in the large cap stocks, in particular, big cap tech.  Those who are looking for a mean reversion towards small cap stocks are ignoring the earnings fundamentals of those smaller companies.  They have lower profit margins, many are unprofitable, and many are in decaying businesses with low barriers to entry and lots of overseas competition.  

More and more, capitalism is becoming more crony and concentrated, with regulatory capture and lack of antitrust enforcement leading to more oligopolies and monopolies.  This is unfavorable for smaller companies that have to compete against much more profitable and powerful companies, who can bully the smaller players.  Like Walmart using their buying power to squeeze their suppliers for lower prices.  Same goes for Facebook and Google squeezing their advertising customers for higher ad rates because there are no alternatives.  The larger companies expand their margins at the expense of the smaller companies and consumers, resulting in the rich getting richer, and the middle class and poor getting poorer.  

None of this changes with Trump back as President.  I don't expect much change at all despite all the optimism about tax cuts and deregulation.  Washington is a huge swamp, and there are tons of lobbyists and insiders who don't want change.  

The hype surrounding tariffs is overblown, just like it was in 2018 and 2019.  At least this time, it seems like most investors are seeing tariffs for what they really are, just a negotiating tool to try to coax better trade deals, not a long term strategy to increase US manufacturing.  The problem for Trump is that China and the other major US trading partners know this and will go to the brink, because they know that Trump won't sacrifice the US stock market and the US economy to try to win trade deals.  

What is priced in, and expected by the majority of investors is an optimistic outcome for the US economy.  So even if there are no long term tariffs implemented, there is a lot of room for the US economy to disappoint.  I see very few discuss the implications of less immigration into the US, which is negative for growth.  In a low cost labor shortage situation that the US is in, less immigrants puts a constraint on growth, while also increasing wage inflation, which will hurt margins for businesses relying on cheap, immigrant labor.  

Due to an aging population and less population growth, economic growth will likely disappoint over the next 4 years.  Bonds should make a better investment than stocks during Trump's 2nd term, something that would surprise many.

The COT data for SPX futures shows some dramatic positioning changes among asset managers.  They have aggressively pared back their monster net long position, to now get to levels that were seen nearly a year ago.  All the build up of those longs from May to December 2024 have been liquidated.  

This is similar to the asset managers reducing their extreme net long positions in the 2nd half of 2021, even as the SPX was making higher highs and higher lows.  It appears that we reached a sentiment top in the market in early December, and while we likely reach new all time highs, it will be with less enthusiasm among the investor community.  That is actually a bearish sign, because all of the major tops over the past 25 years (2000, 2007, 2021) happened as optimism topped out months before prices topped.  There is probably a few more months left for the market to grind higher amidst waning numbers of bulls, based sheerly on momentum.  But once that momentum dries up, which it likely does sometime in the next 6 months, there is a lot of downside fuel with all the overvaluation and high US equity positioning among households and foreign investors.  

Last week we got the fake breakdown panic move under SPX 5800, which spring loaded the market to shoot up after the CPI came in softer.  It looks like the 1 month long pullback starting with the sharp FOMC day drop on December 18 is now over.  That is about standard course for choppy pullbacks in a bull market.  You rarely see more extended pullbacks in an uptrend like this, unless of course, the uptrend is over.  But that is not my base case.  Considering how much asset managers purged their SPX futures long positions, I would expect another spurt higher in the coming weeks.  

Unfortunately, I sold too early last week, expecting a short term pullback which never came.  I am looking to get back in the long side, in small size, if we get some retracement this week.  I am not sure I will be getting it, as this market now seems poised to make new all time highs within the next couple of weeks.  

Bond Rout Flashbacks

The market is getting a flashback to past bond routs seen in much of 2022, and fall of 2023.  This time, its happening despite inflation stabilizing around 3% and with the Fed no longer in its higher for longer stance.  Instead of being led by a weak short end with higher for longer fears, now its being led by the long end with Trump induced supply concerns about lots of coupon bond issuance, tariffs, and more tax cuts. 

I remember back in October 2023 when the 10 year was approaching 5%, Rick Santelli of CNBC suddenly went crazy and talked about 13% 10 year yields as if he was being time transported back into the early 1980s.  Yields topped out soon afterwards and went straight down for 2 months.  

While we don't have the Rick Santelli contrarian indicator this time around, I am getting similar vibes about investors' opinion on the bond market, without a lot of fundamental changes.  

Sure, Trump will threaten and probably slap on some tariffs, but that increase on prices on imported goods will be offset to some degree by less consumption in services and non-imported goods.  I would be more worried about a resurgence of inflation if China and the emerging markets were suddenly running hot, with commodity prices surging higher and the dollar much weaker.  I just don't see why anyone would get excited about the current inflation picture.

As for growth, I just don't see a sudden surge in the global or the US economy that would justify a big bond market selloff.  That strong nonfarm payrolls number doesn't tell you much.  You saw a bunch of hot nonfarm payrolls numbers in 2023 and they were wholesale revised in 2024.  The NFP data collection process is broken and its a dinosaur which doesn't give you an accurate picture.  Based on worker behavior, they are clearly less confident about the labor market, as you see much fewer job quits.  They all say that deregulation and Trump bump for the economy will increase growth in the US, but there is nothing concrete to those proclamations.  Its parroted commentary from the investor community that induces people to sell bonds.  

This particular bond selloff has less merit than the one you saw for much of 2022 and fall of 2023.  First, the Fed has actually cut 100 bps, so you have a yield curve that is upward sloping, which makes it more attractive and positive carry for leveraged funds to buy longer maturity Treasuries.  Second, Trump will be looking to replace Powell and appoint a much more dovish Fed chair for 2026, so its unlikely that you will see a selloff in bonds catalyzed by front end weakness like much of the past 2.5 years.  Third, with reverse repos outstanding down to much lower levels, the end of QT is coming sometime this year.  Lastly, the idea that tariffs are bad for bonds isn't proven, and its unlikely to be the case because tariffs are a tax on consumption, which will hurt growth, which is arguably the more important factor for bond prices than cost push inflation.   

That being said, I would prefer to buy stocks than bonds in the current environment because this belief that Trump policies are bad for the bond market can go on for several more weeks until its disproven later in the year.  

I just can't picture an end to this grand bull market in US stocks ending on yields going up.  The much more likely scenario is that growth and earnings disappoint, and you get a selloff in stocks based on growth fears, not inflation/higher yield fears.  

Back to the stock market.  The COT data as of 12/31/2024 shows asset managers purging more of their net long positioning, selling 57,000 more ES contracts to get down to a net long position last seen in early November, and early September, before the FOMC 50 bps rate cut and the Presidential election.  It reminds me of the asset managers reducing their large net long positions in the 2nd half of 2021, as the SPX was in the last innings of its rally.

You finally saw an increase in the put/call ratio on Thursday and Friday, as investors finally started buying puts.  ISEE index dropped down sharply last week, to levels last seen in October.  A lot of the froth has come out of the speculative names as well, especially the quantum stocks that got hammered last week.  

Last week was wild, and didn't get bulls much time to sell the rally, once again, even less time than the brief rally around Christmas.  Thus, I missed the graceful exit and unfortunately didn't cut losses on the way down.  I'm not holding a big position, but I don't intend to add to it as there could be one more move lower towards SPX 5700 on this down wave.  

Not much to do here, I will hold on to the long position, and ride it out here, I do expect a rally soon, and it could be a lasting bottom if you see some panic and capitulation this week.