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.