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.