Bonds are Controlling this Market

You get these type of markets about once every 4-5 years.  They are not common.  A sharp bond selloff after a parabolic bull run the previous year.  November-December 2016.  June-July 2013.  May-June 2009.  The bond selling is front running either an economic recovery or a fear of a change to a tighter Fed policy.  By the time the economy actually starts getting better and Fed is getting tighter, the selling is usually over and bonds are actually a good investment again.  

In all 3 of those instances, 2009, 2013, and 2016, there was a lot more rally left in the stock market.  But I have a feeling this time is different.  The financial markets have gotten smarter.  They now mostly ignore ecoomic data releases like the nonfarm payrolls report and ISM and CPI reports.  They know now that its better to have a weak economy with a very loose Fed than a strong economy with a tightening Fed.  And its the best to have a strengthening economy with a loose Fed (like now) at least until the bond market stops playing along.  

Last week, the bond market stopped ignoring the insanity of the government spending $2 trillion more every few months without any tax increases.  It started realizing the consequences of the lopsided supply/demand dynamic with a Fed keeping purchases the same as Biden goes on a spending spree.  Bond prices have to go down when there is more supply, inflation rising, and commodity prices making 2 year highs.  

What is interesting about the stock market is that its at such a high level compared to past bond market panics, that it is having a hard time shrugging off the selling in bonds.  The S&P 500 feels very weak, even when it made that big move higher on March 1.  It felt more like automatic first day of the month inflows pushing prices higher than where the natural buyers and sellers are at.  

A lot of picking the right direction for the market is based on that gut feel, the intuition gained from watching AND studying markets for several years.  And its still tough, because the market always provides the most liquidity for the wrong side of the trade.  Its always easier to get long weak markets and to get short strong markets.  Strong markets don't give longs much time to get in.  That's how November to February felt like.  Now its a different ball game.  It still doesn't feel like a weak market, but it does feel more balanced than the previous 4 months, when bulls were clearly the stronger side.  

One of the most important lessons that one can gain from these type of markets is that avoiding the big drawdowns and flush moves lower is the most important part of trading.  Its not about hitting home runs and offense.  A good defense goes a much longer way than a good offense.  Good defense with a mediocre offense will give you a chance to making a living at this game.  Good offense with a mediocre defense is asking for trouble and a blowup is just a matter of time. 

Inflation Talking Heating Up

 With crude oil relentlessly going higher, along with the grains and industrial metals, the bond market is feeling the heat.  Its the reflation trade, part 86.  We've seen this story before.  Anytime you get a weaker dollar, commodities going higher, and lots of money printing, the inflation alarmists come out of their bunkers to recommend that you sell bonds and that a commodities super cycle is coming.  

I am one of those inflation alarmists.  But I never took any action because I was focusing on stocks and wasn't looking at the big picture.  But now is not the time to act on those views.  Same with going long stocks, as the inflation talk has weakened the bond market to the point where it is going to start being a negative for the stock market.    

Most big selloffs in stocks were preceded by a big selloff in bonds from anywhere from 1 to 5 months before it happened.  If this bond weakness goes into June, that sets up a potential waterfall decline scenario to occur from anytime from July to December.  

We are seeing some of that bond weakness spilling over to stocks.  I wouldn't be a buyer of this dip until you get closer to SPX 3860, the previous high in January.  Don't expect any big selloffs just yet, still feels like too many people are looking for that 10% correction and stimulus pump is still ahead so no big flushes until at least the first Biden stimulus is passed.

Russell 2000 is the Leader

 In 2020 the Nasdaq 100 was the leader.  After the election, and with the market looking ahead towards more fiscal stimulus and the "reopening", the Russell 2000 has become the leader.  The driver of short term price moves, the fast money, are overweight the Russell 2000 and underweight the big caps.  They are overweight speculative and cyclical stocks, and underweight low beta and defensive stocks.  

The Russell 2000 still looks strong, it has tripled the upside of the SPX since the January 29 low.  But a little bit of a change in character has happened since Wednesday.  The Russell 2000 has lagged the last 2 days.  

Nothing to be too worried about now, but something to keep an eye on because Russell 2000 is now the leader, and a lagging Russell 2000 is a signal of buying saturation among the fast money crowd.  That is when the market becomes vulnerable to sudden flush down moves.  

It is too late to buy, and a bit too early to short.  If I see the Russell 2000 continue to lag even as the SPX is going up, that will get me more interested in putting on a short position.  2 days of lagging performance in a flat market isn't much of a sell signal.  I need to see more, and preferably lagging RUT while the SPX is going up, not down.  When markets sell off, the Russell 2000 will almost always underperform the SPX.  So I need to see RUT lag when markets are flat or going higher.  

Still not getting much of a signal from the bond market either.  And Powell is a chirping dove, which was confirmed this week.  Powell has been completely neutered by the market.  He is an eunuch.  He will not change his tune easily, so that makes it tough to play for anything more than short term pullbacks on the short side.  

Past bear markets and waterfall declines (except 2020) were all preceded by Fed rate increases (1929, 1973-1974, 1987, 2000, 2007, 2018).   So you've got to be aware that you probably aren't going to get a bear market until Powell signals tapering. 

Put/call ratios are grinding lower, but as I've mentioned before on Twitter, retail call buyers are skewing ratios much lower, and they are not drivers of overall market direction, so you have to normalize for that.  Low put/call ratios will not give you a big warning signal anymore unless that persist for several days near 52 week lows. This week is a start, but need to see more of it next week.

Didn't Sit Tight

“It never was my thinking that made the big money for me. It always was my sitting. Got that? My sitting tight! It is no trick at all to be right on the market. You always find lots of early bulls in bull markets and early bears in bear markets. I've known many men who were right at exactly the right time, and began buying or selling stocks when prices were at the very level which should show the greatest profit. And their experience invariably matched mine--that is, they made no real money out of it. Men who can both be right and sit tight are uncommon.”- Reminiscences of a Stock Operator

The above is my favorite quote from Jesse Livermore's book.  It is harder to sit on a winning position and hold than to sit in cash and hold.   Especially for the counter trend trader, who by definition, is looking to sell after a rally and buy after a selloff.  That is the one big advantage of trend trading over countertrend trading:  bigger winners.  

There is a price to be paid for having the optionality that cash provides.  When stocks keep going higher, you are left in the dust, pounding sand at the thought of "what if, I just held a few more days..."  

There is a big difference between making money in trading and trading well.  I made money last week taking advantage of a great dip buying opportunity, but I didn't trade it well.  I sold earlier than I originally planned and didn't give the market sufficient time to make even more just by sitting on my positions. On to the next trade, to try to execute better the next time. 

We are in the late 1999/early 2018 style sell bonds buy stocks rally phase.  This is when bond and cash holders feel like suckers for either being flat or losing money in bonds and envy those that are all in on stocks.  I am already envying those who didn't sell last week on the V bounce and are still holding longs.  I am paying the price in lost profits, which is still painful to experience when I knew the bubble would keep getting bigger, and I decided to try to play for the optionality of going to cash to be able to buy a dip.  And that dip will be coming from much higher prices, with no guarantee of reaching my desired entry level below SPX 3750. 

The speculation is rampant, as biotech is the main recipient of speculative cash flows.  The Rona stimulus package, is not really stimulus but dollar debasement.  When the stimulus is paid for by Treasuries that the Fed will eventually monetize, that is pure dollar debasement.  It benefits people who spend dollars quickly, and punishes those holding cash to spend at a later date.  That is the main effect of the stimulus.  In other words, all these huge spending packages do is cause inflation, and the market has caught on to that realization.  As crude oil trades even stronger than the SPX despite the lockdowns and Rona still almost everywhere.  The commodities market will be the long term winner of this dollar debasement.  The losers will be the conservative savers who parked their money in bonds. 

Not Rocket Surgery

 Do you want to talk about GME and Reddit, gossip and repetitive takes from the finance "experts" or do you want to talk about something that actually matters for the overall market?  The game is not that complicated, but many of us make it so.  Most of the time, simple logic is good enough. 

We are getting a bunch more stimulus thanks to the Democrats' die-hard belief that government spewing cash to individuals, state and local governments, and for pork projects somehow makes the Rona go away.  And with budget reconciliation, the Dems only need to please their most conservative Senate member, who is Joe Manchin.  So you are going to get a lot of pork for West Virginia and for whoever gives him the financing for his campaigns.  That's the price Biden has to pay to ram through a stimulus bill with only Dem votes.  

So we are going to get at least one more stimulus bill jammed through with only Dem votes, so its probably going to be close to $1.5 trillion.  Half of that money is going into a black hole that has no connection to Covid relief.  A lot of that stimulus money will flow towards the stock market.  Because most of the money will end up going to people/corporations that don't need it, so what do people and companies do when they get money from heaven they don't need?  They invest it.  And most of it ends up either in stocks or bonds.  

In order to finance this stimulus, they will issue Treasuries, so you have Treasury issuance to give people money to buy stocks and bonds.  So you have net increase in bond supply, and a net increase in stock demand.  So until the stmulus works its way through the system, or is sufficiently front run by the market (not there yet), you will have net upward buying pressure in stocks and corporate bonds, and selling pressure in Treasuries.  

So the best strategy for the next few months while the stimulus hits the economy is to either buy the US stock indices, or sell Treasuries.  

Sure, in the short term, you will have fluctuations, but if you look beyond that, the upward pressure on stocks will come to bear.  

The short term is a hard time frame to predict, but as you look beyond a few days and weeks, the longer term supply and demand factors play out.  That's why I'm still holding my long SPX position, although I will be looking to reduce it in the coming days because the weakness in bonds is an early sign that the rally will soon top out.   

The quick V bottom on Monday and rallying strongly into Tuesday tells me that a lot of investors were waiting for the all clear to buy the dip.  Now that SPX is closer to all time highs, its a bit harder to predict the next move.  I do eventually expect much higher prices in March, but will there be another dip before that, or will it just keep going higher with minimal pullbacks along the way?  That is a harder question to answer.  

Its hard enough to predict the destination over 2-3 months, but to also try to predict the path to the destination is almost impossible.  It is trying to seek perfection and the markets usually don't reward perfectionists, just speaking from experience.  

But selling some of my position near all time highs frees up the dry powder that I could use to take advantage of any dips this month.   If you don't sell, you don't have the free cash to take advantage of the buy the dip opportunities.  So the plan is to sell about half either today or Friday and keep the rest for much higher prices.  And if there is another sharp dip like last week, then I will use the cash freed up to buy again.  Rinse and repeat.

Finger to the Wind

 A small minority make money in the markets.  So by that logic, you cannot do what the majority if you want to win in the long run.  Not talking about investing, but speculating.  Investing is safer, but almost always not life changing.  Speculating is riskier, but has a much higher probably of making life changing money.  

That is the basic principle that I follow when I make trading decisions.  And since I'm not trading in the pits or talking to clients, I need to get information.  Information about what the majority are thinking, trying to figure out how that will affect the market.  Information is the most valuable thing in this business.  Charts alone don't tell you much.  You need to know what people are thinking if you want to improve your predicting skills.  And experience from remembering past instances with similar investor behavior and thoughts, with similar charts.  

I don't watch CNBC and read Twitter for fun.  Its a job.  There isn't much joy in watching a bunch of so-called experts with little to no skin in the game making market calls with irrational confidence.  Its like hearing from the armchair quarterback sitting on his couch calling into a sports radio talk show acting like he knows more than the head coach about every little detail. 

So that brings me back to the current market.  This is not like June 2020 or September 2020.  We are in a full blown bubble now, and there are positive catalysts (stimulus) ahead, not high uncertainty events (the election).   That makes any selloff different, because most investors want to be long ahead of a stimulus bill passing, unlike ahead of an important election.  So that itself makes the selling more likely to be shorter in duration that what you saw in fall of 2020.  

Ok, so some may be thinking about February 2020 again.  Again, a very different situation.  The economy was getting worse, not better, as it is now.  And once again people were looking ahead to the uncertainty of the Rona, now there is the uncertainty of how much stimulus will be passed, which is a totally different kind of uncertainty, an uncertainty that the market likes to have.  

How about January/February 2018?  Again, a totally different situation.  Powell was super optimistic on the economy and a little worried about inflation, now he's somewhat pessimistic on the current economy, and not worried about inflation.   Maybe we'll get a different Powell in the 2nd half of the year, but he's still not going to change his tune until you see mass vaccination done and the economy fully reopened.  

And then we can go to the anecdotal things that I heard last week.  Worries about a correction, too much retail speculation, hedge funds under pressure and needing to sell longs because of their shorts getting squeezed, Fast Money bearish in the short term and looking for a pullback.  Those worries might have more merit and accuracy if this was actually a weak market and not one in an extremely strong uptrend.  In an uptrending market like this with few big pullbacks, last week was the first 4% dip we've had since late October, you need to look for long opportunities not short opportunities.  This market still hasn't given you many chances to buy at a meaningful discount from all time highs.  That usually means that there are a lot of dip buyers who've been waiting to get in and haven't been able to until late last week.  The first meaningful dip after a long uptrend is a good risk/reward buying opportunity.  

I am long SPX and will probably keep it for several days, at a minimum, and may hold some to play for a blow off top sometime in the spring.  Won't be trading in and out of the position, will just hold here just in case we get that V bottom to new all time highs again.  Good to see that the bulls got a bit scared on Friday, it clears out the weak hands and makes its more favorable for the long side over the coming few weeks. 

Fast Money is Short Term Bearish

The market was looking for any reason to selloff and GME and the big short squeeze in highly shorted names was used as the excuse.  Do I believe that to actually to be the case?  No.  What you had was an overextended long position among the hedge funds, with high net long exposure.  In those situations, a pullback is always imminent.  And this looks to be the pullback.  I don't expect anything nefarious, and there is a good chance that its just a 2-3 day pullback that goes right back towards all time highs.

On GME.  This has become a cult stock.  Like TSLA, the stock is more famous than the company itself.  No one could give a rat's a$$ about GME the company or how the stores are doing.  Same with TSLA.  Its all about the stock.  GME is now famous for its stock, and that itself means there is a lot of future sticky demand for its stock, from both retail and institutions trying to play for short squeezes and momentum.  The mean reversion to more reasonable valuations will take a very long time.  Just like it will with TSLA.

I've been on the sidelines for most of the month but I did come in to buy the weakness on Wednesday near the close and also on Thursday in pre-market trading.  Its amazing to me how quickly the Fast Money crowd goes from super optimistic to looking for a pullback, just because of GME and the domino effect of short squeezes and forced liquidation in highly shorted stocks?  LOL.  You can't make this stuff up.  

Tony Dwyer, the permabull who comes on CNBC quite often, is a great contrarian indicator when he becomes short term bearish, because it doesn't happen that often.  He was short term bearish in December, looking for a short term pullback, and the market kept going higher.  There are a few other cases where his short term bearishness was wrong.  And one of the talking heads on CNBC Fast Money agreed him.  So a double contrarian indicator.  Anyway, he starts talking about 2010, the flash crash, and how he's short term bearish, and to cover all the bases just in case he's wrong, he says he's long term bullish because of the Fed and Powell.  

No one trades on their long term views.  Almost everyone trades on their short term views, because the people who come on TV to express market views are not long term thinkers.  Almost all of them are trying to catch the next move, not the next BIG move.  So if someone is long term bullish and is optimistic but is looking for a pullback, then they are bearish.  That's how most of these permabulls, of which there are plenty, express their bearishness.  

The market has gone nowhere for the past month, so its making a base near all time highs, and a less than 3% dip gets the "experts" bearish on the short term.  To me, the market looks like its basing near all time highs set to grind even higher.  It is a bubble, after all.  And bubbles usually get bigger until they go parabolic and pop.  What I've seen in January is nothing like a parabolic move higher and a popping of the bubble.  Sure, the momentum names and highly shorted stocks have done well in January, but overall, SPX has gone nowhere this month.  And it appears that pension funds have been rebalancing by selling equities and buying bonds this week, putting some pressure on the stock market.  That should be done by today, the last day of the month.  

On another note, the VIX going to 37 on Wednesday is amazing to me.  That is almost as high as it was before the election in October as the market was making its final big dip before the relentless post election rally.  Realized vol is nowhere close to the implied vol levels shown by VIX.  That is a longer term worrisome sign, that market makers are not willing to sell put protection at reasonable prices.  There doesn't seem to be a lot of hedge funds coming in looking to sell puts to generate income.  Maybe all the put sellers got taken out in March 2020 and are no longer there to sell SPX puts to keep VIX lower.  Instead, they've been busy rotating from big tech to the cyclicals and small cap names.   And the intraday air pockets and plunges lower are a sign of a lack of excess cash to buy the dips and buffer the volatility intraday.  

 
Market does feel saturated with longs but with positive stimulus and re-opening catalysts still ahead, I expect a much bigger move higher, and more optimism before you get that 10% correction. 

Pullback Looks Imminent

Yeah, these days everyone is talking about GME and other short squeezes (AMC, BYND, etc) on heavily short stocks.  So I don't have much to add on the topic, short term, I am not playing those names, and long term, well, let's put it this way:  I see at least 300 individual stocks that I have about 80% downside in a year, on average.  So GME just joined the club, with another 299 members.  This is no exaggeration, it is just the ridiculous bubble that we are in, and its at a very late stage, so 1 year is definitely enough time to catch an 80% down move, even if there is a few more months of this bubble left.   At this point, I am looking at the short borrow rate, the average cost to maintain a short for one year in many of these names, to see which ones to short and hold for the ride down lower.  

Barring any fireworks in the final 3 days of the month, January will be the 3rd straight month without more than a 2.5% correction (daily basis) since end of October.  That wouldn't be a big deal if the VIX was ranging from 12 to 16, but its been between 20 to 30.  So you have had a high VIX for 3 straight months, even though you haven't had a  move of more than 2.5% down on a closing basis.  That is the kind of market that makes put options buyers feel like suckers.  And when investors start feeling like put protection is a waste of money, a correction is usually coming soon.

The intense intraday volatility lately even as the SPX stays near all time highs is a warning signal that for the short term, the SPX has reached the saturation point, where most investors are nearly fully invested, and aren't looking to aggressively add more equity exposure.  Hedge fund positioning data from prime brokers all point to hedgies being the most net long since 2007.   

For me, positioning data is much more important than sentiment data which changes  frequently, often based on whether the market went up or down that day. Commitment of traders data is confirming that asset manager long exposure is near the top of the range for the last 20 years, although they are still not as net long as a % of open interest as in February 2020.  And considering how strong the market has been over the last 3 months, that's not a sign of an imminent top. 

We haven't seen the broader market go parabolic like the Russell 2000 and the bubble stocks, so the SPX isn't really that overbought.  With the gap down today, SPX is up only about 1.5% on the month, which is nothing compared to what you see in other bubbles in their final stages.  So that gives me more conviction that the stock market still has considerable upside left, so after a February pullback, there is perhaps another 10%-15% higher, before you can short on a longer time frame to catch a monster move down.  

I still haven't pulled the trigger to get short, just playing it very cautiously on the short side, but another rally to an all time high next week would be enough to tempt me to put on a short.  I wouldn't be looking for a big move lower, maybe 100 SPX points of downside.   

I am also looking at possibly shorting bonds during the next stock market dip, I am more optimistic on the economy than most of Wall St.  There are lots of negative catalysts for bonds in the coming months: fiscal stimulus negotiations, increased supply from the stimulus bills, reopening of the economy after widespread vaccination, increasing commodity prices.  

FOMC meeting today, expect Powell to say the SOS and kick the can down the road.  The Fed are experts at looking at the rear view mirror, so don't expect them to do anything forward looking like bubble mitigation for financial stability or anything else useful.  

The ARK Bubble

You might not notice looking at the SPX or the Nasdaq, but there is a huge bubble going on.  It is showing up a bit in the Russell 2000, but not to the extent that you saw it like in the Nasdaq in 2000.  The speculative fervor has moved on from AAPL, AMZN, GOOG, FB, MSFT, to an even more overvalued group of almost everything in the ARK ETFs (ARKK, ARKG, ARKQ, ARKF, ARKW), the largest holding being TSLA.  Its not as if ARKK is just holding a few stocks, it hold 52 stocks with none of them with a weighting greater than 10%.  It is a broad representation of the mid to large cap speculative space.  Add in ARKG, ARKQ, ARKF, and ARKW to round out to various other sectors and you have a good representation of a newer version of the 1999-2000 dotcom bubble. 

The divergence between the S&P 500 and ARKK are reminiscent of the divergence between the SPX and Nasdaq in 1999-2000.   

The above chart shows Nasdaq vs SPY from late 98 to the top in March 2000.  

And let's not forget the smaller cap stocks like a BNGO, GEVO, BLNK, or UAVS not represented in those ARK ETFs that are up between 500 to 1500% over the past few months.  Oh, and also the SPACs, which aren't in any of those ETFs.  

The US stock market has turned into a giant, crowded casino, with the players euphroric over their winnings and looking to bet more.  Of course, the main source of funds for these rampant gamblers is the US government, via the continuous stimulus and unemployment checks that are pumping up the stock market but not doing so much for the real economy.  

It is a state sponsored bubble, with one stimulus package after another.  The US is debasing its currency to feed a stock market bubble of gigantic proportions.  Of course, all under the pretext of the Rona, the greatest excuse ever made for pork spending and handouts.  

And the Fed has such a huge rear view mirror that whatever happened in the economy a few months ago is what they use to determine monetary policy.  They have no foresight, no vision, its pump a bubble if the economy is weak, and when the economy is recovering, keeping putting more air in the bubble, until its so obvious that the economy is too hot, and then do something minor to pretend like they want to cool it down.  

It is tough to fight a bubble like this when the Fed has its heads in the sand regarding inflation and financial stability.  Its as if Greenspan years of the stock bubble in the late 1990s to 2000 and the real estate bubble from 2004 to 2007 are anomalies, something the Fed could do nothing about.  

All this bubble will do is exacerbate wealth inequality even more, as its the newbie retail investors that are the most fervent buyers of the hot garbage being passed off as ESG investing.  Lots of wealth will be transferred from retail and late to the game institutions to SPAC sponsors (20% cut for finding steaming hot turds loved by retail), corporate insiders who cash out during the bubble, and corporations wise enough to sell as much of their ridiculously overvalued stock　as they can．

Then you will have minted a fresh new batch of bitter bagholders who are too stubborn and hard headed to realize that they bought stock in a company that will just bleed all that cash they raised and never make a profit.  

It looks like you had a fair amount of "scared" money that was waiting for the all-clear from a riot free inauguration before buying more stocks, even if they had to pay up to do so.  In the stock market, with certainty comes a higher price tag

.  
My initial plan to short around 3800 at the beginnig of the year is thrown out the window.  Market is just too strong, the stimulus that is coming is just too big.  If $600 stimulus checks to the bubble heads can cause this much buying, imagine what an increase in unemployment payouts and a $1400 stimulus check will do.  Plus the perfect storm of a re-opening of the economy after the vaccine rollout along with the wealth effect and you have the makings of the hottest economy since the late 90s.

I don't recommend shorting this market unless you reach totally egregious overbought levels in SPX.  And if you look at the SPX over the last 2 months, it has gone up ~200 points, a bit less than 6%, which is a lot, but not so much that a selloff is imminent. Considering how much investing fervor there is, it can continue at that pace for a few more months.  

I think its going higher, but I don't want to buy unless you get a washout and stop run to clear out some of the bold speculators buying calls and penny stocks that go up 100% a week.  It probably comes sometime in the next 2 months, and I want to have a lot of dry powder to be able to buy the dip aggressively instead of defensively.  With that comes missing out on potential upside if the bubble keeps getting bigger without any significant pullbacks along the way.  

I don't mind missing out on more upside since this market is already so overvalued so remaining on the sidelines, playing some individual stocks here and there, but not too big.  

If the SPX does squeeze even higher from here towards 3900-3920 area by next week, I will probably put on a small short. 

Playing the Long Game

In the gambling world, the vast majority of players have a negative expected value (EV) on their bets.  They should either not play, or if they must, in order to maximize their chance of winning, they should bet just once.  That would give them almost 50% odds of winning on most even money payout games.  But for the positive EV gambler, you can maximize your equity growth by following the Kelly formula.  For example, if you win about 60% of your even money bets, you should bet 20% of your capital on each trade to maximize the growth rate of your bankroll.  

Now 20% on each trade sounds ridiculous and too risky but that's what the math says.  If you want to be more conservative and bet with half Kelly, so 10% on each trade, that's still going to cause a lot of fluctuations in your account equity.  Even with a 60% win rate, the odds of losing 5 in a row, are 0.4 x 0.4 x 0.4 x 0.4 x 0.4 = 0.01.  So on average, after 100 trades, you will have had one losing streak of 5 trades.  Even at half Kelly, that's a 41% loss after 5 trades.  A lot of traders would consider losing 40% almost like blowing up, but that would just be a standard, normal losing streak for the half Kelly bettor.  It would also take a stubborn and unflappable mentality to withstand that kind of loss and stick with the same strategy.  Those are uncommon traits. 

In trading, if you have an edge, just like in gambling, you have to bet big to win big.  But you can't be out of control and start betting bigger and bigger to make up for past losses, you have to do the opposite.  And if you are winning, you have to bet bigger and bigger to maximize your growth rate.  Its not natural for most people to bet that way.  Most want to bet smaller and less often after wins to protect their winnings, and bet bigger and more often to turn a loss into a win.  

In this business, there is no pre-determined income.  No guarantees. You don't know when the opportunities will come, and usually, the best opportunities come all at once.  Trying to make money every day, every week, or even every month just leads to a lot of overtrading, betting too big, and forcing trades when the probability is not that favorable.

That's why when you have a good market for your style, you've got to be a pig.  You can't be satisfied with singles and doubles, you need to go for home runs when things are running hot.  That is to make up for the majority of the time when the markets are tough and you have to just grind for small wins, or to break even, and stay disciplined to avoid those big losses that are account killers.  

This brings me back to the current market.  My bread and butter pump and dump setups are just not working in this small cap HODL environment.  The parabolas are extended and go on for longer than in a typical market.  It has been a painful time to be a short seller who holds longer term positions, because so much junk is flying higher, and staying high.  I know that in a year, almost all of them will be down 60-90%.  

Fundamentals aren't important right now, its all about finding the hot sector and piling in and chasing momentum.  I've been fighting that momentum, so its been a grind for the last few weeks. 

The bears that have survived so far are the ones who have been quick to cut losses, and avoid taking a stand on companies, even if they look fraudulent or are just a lot of hype.  It is one of those rare, extended time periods when the negative EV players are on a hot streak.  Retail investors are making a lot doing all the wrong things, ignoring long term fundamentals, chasing hot story stocks, buying stocks in companies with low share prices, thinking they are cheap.  Its working for them for the last 2 months of 2020, and even better during the first 2 weeks this year.  

The overall short interest as a % of S&P 500 market cap is now at the lowest levels in the last 20 years.  There aren't really many shorts left in this market, most of them have gotten run over and have thrown in the towel.  The short interest in TSLA has gone down huge over the last 12 months.  This week, GME, a stock with over 200% of its float shorted, squeezed up 100% on air.  Shorts got absolutely destroyed on that stock, and a lot of other heavyily short names also had big short squeezes.

its a very difficult time for the short sellers, and with record high valuations and excitement among retail investors, it probably means that a very good period for short sellers is just around the corner.  The US stock market hasn't had a proper bear market in 13 years.  The last one, from October 2007 to March 2009, laid a great foundation for a long bull market.  Those big drops in 2011, 2015/2016, 2018, and 2020 were too brief to reset the stock market to a more long term sustainable path. 

Now we're seeing what happens after so many years of big gains and quick recoveries.  Rampant greed, Wall Street feeding the ducks with lots of SPAC IPOs which will end up being albatrosses considering how much money is chasing the EV, Solar, Biotech, and other hot sectors.  Since most IPOs have a 180 lock up period, you will start to see a lot more supply being unlocked and free trading later this year.  I think that's what kills the momentum in these go go names, just the sheer supply of hot SPAC garbage that will come public in the coming months.  

On Friday, we got the post Biden stimulus selloff, exacerbated by a big opex Friday.  I was waiting for a bit higher to short, so missed the short entry on Thursday, but I don't see much downside after Friday's selloff.  Post 2008 modern markets have a tendency to keep trending up and maintaining very overbought levels for an extended period of time.  And bubbles usually top out with a parabolic blowoff phase, and I don't think we've seen that yet.  

I am still in buy the dip mode, sell the rip mode is still a bit risky unless they are nearly perfect setups.  And Thursday was not close to being a perfect sell setup.  I might even go long on this small dip on Tuesday, as I expect another all time high after inauguration and the Biden stimulus talks get more serious. 

 

Adjusting to the Insanity

This isn't an easy market to trade from the short side.  Even during the craziness of the EV parabolic rise in November or the biotechs in December, the pumpers still dumped a decent amount.  Starting from late December, the pumpers just didn't dump.  They went up, had a very small pullback, based, and blasted off again.  And these blast off moves aren't off of small up moves.  Some of these stocks were already up 300% in a month, and then it would go up another 150-200% in a few days.  

These are breathtaking moves, no wonder the retail investors are in a frenzy, because most of the ones driving these stocks higher aren't used to winning so much.  Its like the casino gambler who is on a hot streak, winning over and over again, completely different than what would normally happen to him.  That feeling of euphoria you get at a casino as you win on almost all of your bets is what these retail traders trading these $1 and $2 stocks are feeling now.

This probably keeps these retail traders in the markets for the long term, turning into post bubble bagholders, but that's a bridge to cross in the future.  That will be bring on another set of opportunties later.

With the insanity of the parabolic rise of so many of these crappy, speculative penny stocks, on top of the multi billion institutional darlings have made it tough to hang on for longer term shorts.  There are so many names right now that are grossly overextended and ripe for a sharp pullback that it is hard to choose the right ones.  I am sure most of them will all go back down together, as they mostly went up together.  The plan for swing trades is to stay away from the heavily institution owned pumpers (PLUG, FCEL) and focus on the heavily retail owned pumpers (BNGO, FTFT, etc). 

With the coming $2000 stimmy checks coming soon, I am sure a lot of that money will pour into these crappy stocks.  Rumors are that the Biden stimulus package will be $2T, which is absurd, since its on top of the already $1T spent just in the December stimulus bill that passed.  And I am almost completely sure that even if the economy gets hot, there will be no desire or ability to raise taxes.  With just a 50-50 split in the Senate, its highly doubtful that all Democrats will be on board for a tax increase, especially since some of the moderates will vote down any meaningful tax hike. 

So most of the Rona stimulus will end up in pork pet projects solely for the benefit of campaign donors and those with politiical connections.   It is a huge transfer of wealth from every holder of US dollar assets (not taxpayer, since none of this will be paid for with taxes) whose dollar holdings will be debased through money printing to fatten up the leeches in Washington DC. 

The reason gold is not keeping up with all the other weak dollar plays (energy/commodity plays, foreign stocks, bitcoin, etc) is because it has gone up quite a bit over the past 2 years due to the Fed rate cuts and QE.  And gold which used to primarily be an inflation trade (from 1970s to 2000s) is now mostly a monetary stimulus trade.  Monetary stimulus doesn't really help the economy much, but it does help boost gold, but fiscal stimulus actually will boost the economy, albeit a sugar high from stimmy cash raining down on Main St. and partially due to the pork trickle down effect.  And a hot economy leads to so many winners that gold ends up going out of favor, even with rising inflation.  

Bitcoin is basically a high beta play on a weakening dollar + rising stock market, so its more of a fiscal stimulus trade than a monetary stimulus trade.  Also, with so much retail involved in bitcoin, a lot of stimulus cash will end up going into further bitcoin speculation.  

It is no longer Rona stimulus.  These pork filled stimulus packages are now Russell 2000, SPAC, and Bitcoin stimulus packages.  

Biden will be announcing his pork package today.  It is rumored to be around $2 trillion, so anything less will be a disappointment.  I am sure when the dust settles, it will be even bigger than forecast as more pet projects get added on in order to win votes.  

We're getting close to a good short opportunity, have been waiting for that one last push higher to all time highs before going into an SPX short.  Thought there would be a run up to the Biden stimulus announcement, but the bitcoin correction's contagion effect kep the stock market in check this week.  So not easy to short here, although I still may take on a very small starter short position with plans on adding higher if we get that extra push higher after inauguration.  Not that exciting to short here, you almost need a perfect pitch to get short this market profitably so being careful. 

Pork: No Pain All Gain

Biden is going to give them what they want.  More pork.  More money from heaven.  Infrastructure.  Probably even some student debt cancellation.  Looks like Kamala is the one in charge, Biden is just the puppet.  The moderate puppet, palatable for the masses, doing whatever Kamala wants.  Pork is now called stimulus.  In the old days, they would just call it deficit spending on whatever pet projects politicians wanted to fund.  The euphemism is stimulus. 

Why work in 2021 when you can just stay unemployed, collect unemployment checks,  and daytrade the latest hot stocks and bitcoin with the gov't handouts.  Where are they going to find the workers to do infrastructure? Mexico?  Guatemala?  El Salvador? Sure won't find them in the US.  I guess that's what the immigration bill will be for.  To find people who actually are looking to work.  

If the Fed doesn't increase QE, there will be a revolt in the bond market with how much issuance is coming down the pike.   I am sure the chirping dove Powell will find an excuse to ignore or deny the higher inflation and give the bond market what it wants.   At least until it's so obvious that economy is too hot and he'll announce a turtle taper, would probably take 20 years to get to zero purchases, and probably won't even get started before he caves to the market again in the coming taper tantrum.  
 
This taper tantrum will be so much worse than the one in 2013, when stocks were actually fairly valued on a historical basis.  I know the excuses about why this time is different, that bond yields were never this low when valuations were cheaper, and that the Fed has your back.  But that is a bogus excuse when Europe and Japan have even lower yields and their stock markets are still way below those in the US over the past year.  
 
In the end,  after Powell caves again, the Fed will be printing the money to pay for the stimulus.  US government doesn't need taxes when you have the Fed covering the tab.  No Pain All Gain.

No wonder bitcoin is going through the roof.  And stocks are surging higher.  And dollar is weak.  With this kind of profligate fiscal and monetary policy, the US is daring the market to selloff the dollar as much as it wants.  Of course, Yellen will repeat her strong dollar policy.  

The US has become an absolute joke.  And its not as if Republicans are any different than Democrats.  They spend almost as much and cut taxes as well.  And demand low rates from the Fed.  

The US fiscal and monetary policy has become a mix of Argentina and Zimbabwe.   Who knows where this will lead in the long run when the world's reserve currency turns to toilet paper.  It won't be pretty once the hangover kicks in.   Sure, everything will be higher in price, including stocks.   For the politicians, if the SPX keeps going up, its all ok. Zimbabwe's stock market is through the roof over the past 10 years as well.  

Bottom line, US is now an MMT country following in Zimbabwe's footsteps, with high inflation (will be denied by Fed) coming, and most of the population too dumb to realize it.  

A commodity bull market in the 2020s will make the 2000s bull market look like child's play.
 
Yesterday we got the big bitcoin correction , down over 20% to 32K, is that the buy of a lifetime?   LOL.  Still waiting to see more excitement and complacency showing up in put/call ratios and news flow.  Could come with Biden's big bazooka stimulus announcement on Thursday, or after the inauguration, when riot risk is over.   

On the individual stock front, the greed and froth is reaching astronomical levels.  The pumps are hardly dumping and retail investors are feeling invincible.  When it gets this hot, it doesn't last for long.

Melting Up

 The markets are super hot.  Bitcoin going supernova parabolic.  SPX making all time highs day after day, Russell 2000 surging higher to shatter all time highs.  TSLA relentless marching higher breaking 800 with ease.  EV stocks ramping higher again with their related SPAC bros coming along.  Biotech staying hot.  This is the hottest market since 2000.  January 2018 isn't even close.  

The parabolic moves increase my confidence that we are a bit closer to the peak of this bubble than I thought a few days ago.   Still a few months away from the peak, but the enthusiasm and fervor to speculate is front loading some of the bubble gains.  

I was thinking about a short at SPX 3800 but the sheer strength of the buying on Wednesday and Thursday after the Georgia runoff and shrugging off the "scary" riots kept me from pulling the trigger.  And we have another gap up this morning.  Wednesday close at all time highs, but well off intraday highs due to the riots was a buying opportunity!  It once again proves that what you see in the news that triggers fear in a subset of investors usually doesn't last.  Riots, protests, civil unrest don't matter.  What matters now is stimulus.  PORK stimulus.  

It is a tricky time for those unwilling to ride the bubble higher, its a bit too early to aggressively short, although tactical shorts at over optimistic moments and after a parabolic rise are ok opportunities, but the better opportunities are buying SPX and Russell 2000 dips on short term stop hunts and shakeouts of weak hands.  

That is why I would only short this market at half my normal position size during those tactical opportunities, but would be willing to go full size on decent size dips in the indices.  

It is clear that Russell 2000 will be outperforming the SPX during this final blowoff phase of the bubble, which should last into the late spring/early summer. With a 50-50 Senate and Dem VP, you have enough votes to pass another big fiscal stimulus package, stimulus checks, infrastructure, and all the goodies that the market wants.  But not enough votes to pass any kind of tax increase or extra regulation that are unpopular among non-Democrats.  So the best of both worlds for stocks, and a nightmare for bonds.  

The market immediately sniffed this out on Wednesday, selling off Treasuries aggressively and the 10 year finally breaking above 1%.  The weakness in Treasuries will be with us for a while, the economy should be roaring by the summer as all the savings and wealth effect from the stock market will drive consumer spending through the roof, along with the re-opening of the economy.   

This will be the hottest economy since 2000.  Hotter than the real estate bubble in 2006-2007, and hotter than the tax cut boost in 2017-2018.  That expectation is fueling the move into the Russell 2000, which have the most economically sensitive names in the market. 

When all is said and done, after the bubble, there will be an immense transfer of wealth from one group of investors to another.  

No need to try to hit home runs now, just play for singles until the truly great opportunities arise later this year.  There will be plenty of chances to hit home runs on the other side of the mountain.  

I am holding off on the short for now, but next week, a potential gamma squeeze higher in the indices ahead of opex Friday, Jan. 15 could provide a premium short entry point to fade this super hot market.  Just watching and waiting until then.

Forecast for an Insane 2021

 You are seeing some truly amazing charts in some of these small cap names.  The latest one is BNGO, a biotech company that diluted their shares several hundred percent over the course of 2020, lingering around 50 cents and out of the blue, the stock goes up over 1300% in a few days to over 7, gaining nearly $1 billion in market cap.  On nothing.  Then you had the copycat sympathy plays as the retail investor piled into other low dollar biotech stocks like CHEK and SYN, expecting the same thing.  

There is so much new and dumb money in this market, that it is infecting even the more experienced money that are trying to get in front of their buying in a game of musical chairs.  The volume is through the roof on these plays.  BNGO traded 579 million shares on Monday.  

The Robinhood herd goes from one pump and dump to another, gifting some of these companies with a tremendous opportunity to raise capital at bloated stock prices, some who are doing it aggressively, like SNDL, IDEX, KNDI, NNDM, while others just sit on their hands, being short sighted by not taking advantage when their stock becomes way overvalued due to daytraders.  

Just like bitcoin, the action is a sign of the times.   Bubbles don't happen in isolation.  They happen in bunches, one after the other, or simultaneously.  The sports card bubble in the late 1980s happened after a big bull market in stocks.  The Beanie Babies bubble in the late 1990s got huge during the beginning of the dotcom bubble.  The bitcoin bubble in 2017 coincided with a big rally in global stock markets at the time.  And again in 2020. 

The animal spirits are flowing freely on Wall Street.  When it gets this hot, and this widespread, with near record stock valuations, its not sustainable for the long term.  As in more than 1 year.  Let's generously say that the insanity started after the big move higher last November post election, with the EV craze going into hyper drive.  IMO, we have at most another 10 months of this craziness before hitting the peak and crashing lower.  At most 10 months.  At a minimum?  Probably until the majority of the population has gotten the Rona vaccine, side effects be damned, so probably 6 months.  So my ball park estimate for the top of the bubble is 6 to 10 months.  

During those 6-10 months, I'm guessing SPX goes up another 10-15%, so SPX 4100-4300. Then, like most bubbles, after they pop, there will be an extended bear market, probably taking back all the gains made in 2020 and 2021, so at least down to 3250, but more likely down to 3000.  Unlike the previous 2 bubbles, this one will be aggressively defended by the Fed, who probably will bring out their biggest bazooka yet:  equity ETF purchases, taking a page from the QE trailblazer, the BOJ. 

That doesn't seem too bad, and I don't expect a dotcom or financial crisis 50% bear market drop from high to low.  But a move from 4200 to 3000 would be extremely painful, especially for those who got into the money game late in the bubble. 

The results are out for the Georgia runoff:  it will be a 50-50 split in the Senate, meaning that VP is the tiebreaker.  This means that legislation will be determined by the moderates, both Democrats and Republicans, as they will be the swing voters.  That means big stimulus but no tax increases.  Most moderate politicians in the middle have no backbone, they pick and choose policies by looking at the polls, so they will choose the popular aspects of the Democrat agenda:  big stimulus checks, big government spending, and oppose the unpopular aspects of the agenda:  tax hikes.  So in the end, you will end up with a truly monstrous budget deficit, putting a huge amount of pressure on the bond market.  

That will put the ball in Powell's hands.  Will he try to keep rates low and thus increase bond purchases even as the SPX bubbles higher?  Or will he just go with the current rate of purchases and accept higher long end rates?  

I believe he'll try to accept rates going higher up to a certain point, maybe up to 2% on the 30 year, but if it gets higher than that and the stock market revolts and demands more QE, expect him to fold like a cheap lawn chair and give the market what it wants.  The guy has no backbone, he was scared shitless back in December 2018 when the market went down and didn't like his final rate hike, and he won't do that again.  

He is a caver.  A folder.   The free money will continue until the market self combusts on its own, which will be from a torrential flood of SPAC issued POS equity jammed down the throat of TINA investors who eventually suffer huge losses as the fair value for most of these private but soon to be public companies is a goose egg.  When these new investors realize that they've been had, they'll sour on the stock market and say its a rigged game and stay away for another 10 years like last time.   

For the first half of the year, expecting a weak bond market, a weaker dollar, and a strong stock market, especially small cap stocks.

Omen for 2021: Bitcoin Bubble

On November 23, I wrote about the EV bubble and how that was a sign of a massive bull market top in 2021.  At the time, the EV stocks were going parabolic, and since then, they have consolidated their gains, a few making new highs, but most are way below those November highs.  

After that, we've had rolling speculative waves, going from biotech to renewable energy plays and most recently bitcoin.  Most bitcoin investors consider it an alternative currency and a store of value, but regularly throw out ridiculous price targets like $100K, $500K, $1M.   I remember back in 2011-2012 when institutional investors, with a straight face, said that gold would go to $5000.  And not in 30 years, but more like 3 to 5 years.  And the thing is they said it matter of factly, not with a lot of enthusiasm, but more as if it was a fait accompli.  Gold went from 1300 to 1900 in 2011, and was still hovering around 1600 to 1800 in 2012, before the big downturn in 2013.  

Does this chart look like an alternative currency to you?  Something that is stable, that will maintain its value?  It looks more like a speculative plaything to me.  A momentum stock.  Value is in the eye of the beholder type of asset.  Like gold.  Like a piece of art.  Like a Beanie Baby.  All of those assets have no cash flows supporting its value.  

From 1995-1999, there was a huge Beanie Babies bubble.  It was a sign of the animal spirits of the time.  

The thing is that those who make the most money off of things like bitcoin and Beanie Babies are the true believers, because they hold on during the parabolic rise.  But the true believers are also the ones who lose the most money as they hold on during the post bubble crash.  Very few can ride the bubble most of the way to the top and get out before the big down move lower.  

I actually think bitcoin will go significantly higher than current prices, but do not believe it will go to $100K like a lot of these bitcoin believers.   I recognize its a bubble, a sign of the times, when SPX is in a big bull market and speculative fever is rampant.  

Bitcoin has some value as a money laundering tool and way to get around capital controls in many countries, but that value is limited, because if that becomes widespread, then governments will do whatever it takes to undermine bitcoin, making it illegal to own. 

What has sustained the value of gold through history was that aside from being used to back fiat currency, it had value as jewelry.  

In order for bitcoin to sustain its value over the long term, it can't just be based on speculative investors inflows.  There has to be a real world use for it, and the only use I can imagine is for underground transactions that are illegal and if it becomes widespread, could cause governments to outlaw bitcoin.

We are off to a strong start in 2021.  Big gap ups in gold, oil, and stocks.  Probably a bit more upside and then I expect a choppy consolidation for SPX from this week's highs (3790-3800?) down to 3630-3650 for the rest of the month.