A list of the hurdles that this bull has overcome since the start of August:
August 1: bad NFP number
August 12: feared CPI number
August 22: feared hawkish Powell at Jackson Hole
Early September: feared bearish seasonality in September
September 5: bad NFP number
September 9: bad NFP revisions number
September 11: feared CPI number
The US stock market has overcome all those "potential" negative catalysts because of the pot of gold at the end of the rainbow: Fed rate cuts. That is driving this aging bull market. We have the much anticipated FOMC meeting on September 17. Expectations are high.
You also saw continued optimism about AI, with ORCL's huge 1 day rally on future AI revenue forecasts. Of course, those projections are contingent on OpenAI keeping their promise, on Larry Ellison keeping his promise. I wouldn't hold my breath. You already saw a big chunk of ORCL's gains taken back from Wednesday's highs to the Friday close. If that ORCL announcement was made in July, I doubt you would have seen it pullback so hard off the highs. It's a clue that investor positioning is quite saturated in large cap tech stocks. It is why Russell 2000 has been outperforming the Nasdaq for most of the past month.
While the SPX and NDX continue to hit new highs, the 2 biggest retail AI names: NVDA and PLTR are both down several percent from their all time highs hit in August. Those are subtle signs that investors who want to invest in those names already have. Now, with rate cuts on the horizon, investors are chasing more speculative names to try to get more bang for their buck.
On Friday, you saw big moves in the quantum stocks (IONQ, RGTI), speculative crypto stocks like BMNR, and of course the biggest meme stock of them all: TSLA. You cannot underestimate the short squeeze factor. Hedge funds have historically high gross leverage in their portfolios, meanings lots of longs and lots of shorts. A lot of high short interest names got squeezed higher, which is a continuation of the trend starting in July. It appears a lot of hedgies are feeling considerable pain in the short side of their portfolios.
Exhibit A for this short squeeze is OPEN. The Chamath SPAC from the go-go days in 2020 is the hottest meme stock in the market. It also happens to have big and growing short interest. 26% of the float is shorted.
OPEN is the poster boy for meme mania, as the worst the fundamentals, with lots of short interest, the better the squeeze potential. Its a toned down version of the meme stock bubble of 2021, when GME and AMC went crazy. It always ends badly, but the speculators all think that they can get out near the top before the bubble pops. Of course, there always has to be bagholders on the way down. Eventually, these ADHD traders lose interest and the stocks take the long road to lower prices. Like AMC below.
The crypto space continues to pump out more PIPEs as the Ponzi continues. The latest big one is ORBS, which raised $270M by issuing PIPE shares to buy Worldcoin, a worthless alt coin with Dan Ives hired to pump it. They are feeding the ducks while they are quacking. The Winklevoss twins IPOed Gemini on Friday, trying to hurry and go public when they can. You are seeing more and more IPOs lately as private companies are hurrying to go public while the investor appetite is there. Very late stage bull market behavior.
What kept me from holding long term shorts was not wanting to get in front of the rate cut optimists pumping stocks higher. Ever since Jackson Hole, Treasuries have traded quite strong in anticipation of a dovish Fed. Now that we've had quite a stock and bond rally so far in "bearish September", it sets up a post FOMC hangover.
You saw 10 year yields bounce back higher on Friday after the euphoria wore off over the CPI numbers. Given the weakness in the labor market and the rate cut anticipation, you would have expected bonds to act stronger this week. But with European and Japanese bond markets trading weak, there just isn't that much demand from overseas investors. China is basically taking all their dollars from their enormous trade surplus and piling into gold, avoiding US Treasuries like the plague. Its a different era, without Fed QE, you are left with a bunch of price sensitive buyers who don't want to pay up for something with such a huge growth in supply. The US debt is at over $37 trillion and rising $2-3 trillion per year.
The economy is clearly slowing but I continue to see lots of denials and stubborn optimism about the economy. The most common reason for the optimism are the big fiscal deficits/ one big beautiful bill / deregulation / AI capex which are expected to support the US economy no matter what happens. But what has been ignored is the much lower immigration numbers holding back population growth, a key component for GDP growth. The only things holding up the SPX are AI capex spending and Fed rate cut expectations. If one of the two fail to deliver on great expectations, there is a huge air pocket below.
In a past age, when Treasuries were a premier risk-off asset, with a slowing economy with Fed rate cuts coming, buying bonds would be a superior trade to shorting stocks. But as mentioned earlier, inflation is just too sticky, and the supply deluge too big to make me a long term buyer of Treasuries. I prefer to make a risk-off bet by shorting stocks rather than going long bonds.
We are about to enter the corporate buyback blackout period which usually runs from mid September to late October. All buyback blackout periods coincide with post triple witching opex, a time when stocks are usually weak. Below is a rolling estimate of corporate buybacks with historical data:
Started a short position on Friday with plans to add this week. Unlike previous short attempts, looking to hold for several weeks as conviction now is higher. The rate cut optimists are overplaying their hand. As mentioned before, Fed rate cuts just don't mean much in a fiscal dominance regime + most mortgages locked in at much lower rates. Lots of room for disappointment during this rate cut cycle.
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19 comments:
Market is making another all time high. Holding off on adding to shorts as the upward momentum is very strong with Nasdaq leading higher. Probably will have to wait till Wednesday or Thursday to add more, depending on price action.
I am just thinking if Fed ignores inflation and proceeds to cut rate, isn't this monetary debasing?
No, its when the Fed does QE or starts another program to add liquidity is monetary debasing. Paying less interest on short term debt is not debasement. Only if it encourages a lot of bank lending which I don't think happens unless you get much lower rates.
Reducing shorts here, don't like the price action for shorts going into FOMC. Will look to add after FOMC meeting. Could squeeze into Thursday/Friday so will look to add short a bit higher.
Reload the short?
Looking to reload Thursday if SPX is above 6625
it is above 6625. how aggressive would u be here at shorting? like a starter position or mid size and what is your view on timing if someone can play this using options? thanks @mo
I am going to be fairly aggressive today putting on shorts. Not going all in, but I will be shorting SPX and speculative momentum stocks which are up big recently (OPEN, TSLA, etc.) If you play options, I would go out to November expirations because I think the top could take up to 3 weeks (not squeezing up, but possible chop near the top) so you want to have enough time. Plus, if you go too short dated, more likely to panic sell and feel time pressure and give up before the big move lower happens.
When you do get the move lower, I expect it to be explosive so you don't need to go short dated to catch a big percentage gain on puts.
awesome thank you. will plan similar today
I started with spx but added iwm puts too
From my technical analysis, Opendoor and Tesla don’t look like good spots to short, so is the reason for shorting them because they have risen too much as meme stocks?
They are both heavily owned by retail investors and have minimal institutional support, and extremely overbought. I expect a rug pull for meme stocks that is much sharper than for the SPX because of how much retail has bought into these momentum and meme stocks with minimal fundamental + institutional support. In the next correction, high short interest + meme stocks will be the biggest losers.
thanks, @mo
Adding to iwm shorts
I am going back to work with trading restrictions so this shorting is my last trade for the next few years. Short spx iwm and gld - hope to make back some of the lossesfrom last few years. My conviction is high and sizing decent with ability to add all of next week
I would avoid shorting gold. And I think its better to short these meme stocks than SPX or IWM here. I am short SPX and the memes, but if I had to choose, I would short the memes.
Agreed gold is tricky. It is going to be very volatile and don’t want to buy calls and cold after such a run
Burnt myself badly on TSLA, CVNA, OPEN type stocks before and will stay put for now. They are heavily heavily manipulated, which is harder to do on SPY or iwm
It is highly likely the meme stocks and heavily shorted names will top out before SPX. I am less certain on the timing for an SPX top, but I can feel that we are really close to a top in all the flying memes.
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