Beyond the Infrastructure Stimulus

You are seeing the optimists rave about the reopening, all that pent up demand, all that stimulus money.  And then the pessimists with their calls for raging inflation and a Fed that will be forced to tighten more quickly than the dot plots show.  

One thing you can always rely on Wall Street is herd behavior.  It is instinctive, pervasive, and hard to ignore.  If you read what they write, you would believe that the infrastructure stimulus will be followed by more big pork projects and stimulus packages in the Biden era.  They all believe the government will just keep pushing out more stimulus, no matter what.  Even when the GDP growth numbers will be high well into 2022, and even when the Republicans take over the House or Senate in the midterms and create political gridlock.  Oh, you say, no way, if the economy is doing great, the Dems will gain seats in 2022.  That's not what history shows.  Midterm elections have almost always been a disaster for the party in the White House for the last 40 years.  

It is a bit too soon to look beyond the infrastructure stimulus, but let's do that anyway.  It seems like everyone has the next 9 months of economic activity figured out.  Unlike the crack high of stimmy checks and pork direct to state governments, the infrastructure spending will be drawn out over many years.  Knowing how slow the US government works, it will take several months to even figure out what to build and where, much less start hiring, buying the necessary equipment and materials, etc.  Really the only big variable left until the 2022 midterm election is how hot the economy gets in the reopening.   Based on all the economic forecasts, most are expecting a booming economy for the next 12 months.  But what the 15 minute macro experts aren't considering is how the economy looks after the stimulus wears off, sometime in 2022.  

The developed world population continues to get older, and the demographics are unfavorable for maintaining high aggregate demand.  Add to that the lack of productivity growth and increasing welfare mentality from all the stimulus.  People in the US are now used to getting government handouts and fat unemployment compensation.  There is less incentive for these low wage workers to look for work or even care if they get fired.  With states now well funded after the 2 giant boosts of federal stimulus to fill their cash hoard, they can now splurge on all kinds of welfare.

When the government takes up a bigger part of GDP, capital is deployed less efficiently, because the government has no accountability.  Most voters vote for their party, no matter what.  Government waste, grift, and incompetence means that the return on investment on all the government spending is very low.  In many ways, the US is becoming more like Europe, except for one big difference:  taxes.  Europe actually tries to keep government deficits under control with high taxes and strict rules from the technocrats in Brussels.  

The US has given up on that "old game" of balanced budgets and taxes to pay for spending.   The new game, government spending fueled by debt that is bought by the Fed, is the magic bullet that suddenly US politicians have discovered as being extremely popular among the public.  It is a game that leads to eventual ruin, but in the beginning, it works great so they will keep doing it, but only under 2 scenarios:  

1.  A unified Democratic government OR 2. a Republican President.  Democrats need to have both the White House and both houses of Congress to pass additional pork stimulus because as we've seen already, Republicans will not vote for anything a Democrat President tries to pass.  But it doesn't work the other way around.  A Republican President can pass whatever he wants even if his party doesn't control Congress.  Because Democrats are always in favor of additional government spending, even if it requested by Republicans.   And that easily assures enough votes to cover even a few dissents from Republicans who don't support pork stimulus.

With the Republicans likely to win at least one House of Congress in 2022, that gives Biden about 18 more months to pass legislation.  And if the economy is as strong as everyone predicts over the next 12 months, it makes it unlikely you will get more stimulus after the infrastructure bill passes.  Will Biden start watching the stock market and try to support it by passing more stimulus if you get a bear market?  I wouldn't rule it out, but unlike Trump, Biden doesn't seem like a guy who really keeps a close eye on the stock market.  

 

About the current market:  I see that there is a growing divergence between the S&P 500 and a majority of stocks which are lagging the index.  You can see this most clearly in the retail and momentum favorites.  Just look at the YTD performance for the ARKK ETF, and the SPX.  Huge divergence there, from outperformance to underperformance.  And also bonds continue to stay weak.  Another negative.  I'm not shorting, but it wouldn't surprise me if you saw a sharp pullback down to SPX 3700-3750 within the next 2 months. 

On Yields, Inflation, Stimulus

Here are a few thoughts on the zeitgeist of the market. 

1.  Nasdaq is underperforming because of higher yields. 

A few years ago, not many people thought that low yields were great for tech stocks.  Everyone equated low yields with low growth, and thus bad for tech stocks.  The biggest ever tech bubble (not including this one!) happened as the 10 year yield went from 4.20% in October 1998 to 6.80% in February 2000.  

Don't buy the argument that the reason Nasdaq is lagging the small caps and SPX is because yields are going up.  Yields were screaming higher in 2018 and the Nasdaq easily outperformed the SPX that year.  The main reason the Nasdaq is underperforming now is because it is over owned and way overvalued compared to the rest of the stock market.  That rubber band got stretched way too far in 2020 and you are getting a mean reversion to more reasonable relative valuations between growth and value stocks.  

2. High unemployment will keep inflation under control.  

Inflation is a monetary phenomena.  Let's say you suddenly give everyone in the US a million dollars when unemployment is high.  The money is printed by the Fed and sent as stimmy checks.  300 million x $1 million = $300 trillion.  The current USD M2 money supply is ~$20 trillion.  So if you multiply the money supply 15x, then everything should be 15 times more expensive, and retailers selling at the same prices after those $1M stimmy checks are idiots and will immediately sell out whatever they are selling.  In reality, instead of giving everyone $1 million, they effectively gave everyone $10,000 (per capita stimulus over the past 3 months ($3 trillion in stimulus). There will be inflation, its just the government and the Fed that will lie about it through their manipulated CPI and PCE numbers.  

3.  Fiscal stimulus will keep coming.  

There will just be one more stimulus left for Biden (infrastructure), one that will be spread out over 5 to 10 years, and then expect the government to take its foot off the pedal in 2022 (economy will be hot).  And after the 2022 midterm elections (odds are very high that Republicans take over the Senate, as midterm elections always heavily favor the party not in the White House + built in Senate advantage for Republicans), there will be gridlock.  And there is NO way a Senate led by Mitch McConnell will give additional stimulus for Biden ahead of 2024.  That means barring some unforeseen economic catastrophe, 2022, 2023, and 2024 will be without additional fiscal stimulus.  That's at least 3 years where the stock market is on its own, and with Fed Funds at zero with a possibility of it rising, but very low possibility of it falling.  That is a disaster waiting to happen.  The market is a forward looking mechanism, it may be too dumb to realize that Republicans will take back the Senate in 2022 but it will definitely consider that possibility, especially if the stock market falters and the economy begins slowing in the 2nd half of 2022 as I suspect.   

 

On the current market, I am waiting for a bigger dip to buy SPX and RUT. SPX 3820 is my target entry point. Not interested in NDX at the moment.  Expecting the next rally to be led by small caps, energy, and financials. 

Powell Following Bernanke

Pansy Powell.  Since the scolding he took from both Wall St. and the stock market obsessed media for raising 25 bps in December 2018, he has been nothing but a Wall St. sell out.  Always giving what the market wants, even if he has to come up with ridiculous excuses and new standards for tightening.  Much like Bernanke from 2009 to 2013, until he finally tapered just as he was getting ready to exit, pulling the pin off the grenade just as he was passing it to Yellen.  

Powell is pulling off the same maneuver that Bazooka Ben did by waiting till the latest possible moment before tightening and disappointing the markets.  What is Powell's excuse this time?  Waiting for the data, BACKWARD LOOKING data.  

Here is how the Fed works:  forward looking data (basically financial conditions) that is showing weakness is a reason to ease (2011, 2019), but forward looking data that is showing strength is NOT a reason to tighten (2013, 2021).  Only backward looking data, in other words stale economic data, that shows big growth will cause the Fed to tighten.  

That means Powell will be doing this same dovish song and dance until the hot data starts coming in during the summer and fall, and then he'll probably float some trial balloons on tapering just to gauge the market reaction.  If the market doesn't blow up, he probably eventually announces a taper after the market expects it at the end of the year.  If the market blows up before year end, you can forget about the taper, and Powell will come up with another excuse about not tightening, such as not meeting their inflation target, or repeating the same garbage about inflation being transitory or unemployment rate is still too high, etc.  

At this point, the market probably wants a tighter Fed, contrary to what Powell thinks.  A tighter Fed would probably keep long end rates from going even higher because at least the Fed will have regained a tiny bit of their inflation fighting credibility.  And if long end rates are under control, that benefits the tech stocks, thereby helping the S&P 500.  But with Powell's short term thinking, he probably thought he did a masterful job pumping the markets on Wednesday and it lasted, for one afternoon, and then an immediate double barrel selloff in both the bond and stock market the next day.

The Fed are a bunch of hard headed doves, they even are slower to tighten than the BOJ, with their moribund economy.  It probably takes more market worries about inflation before the Fed finally gets the message and starts talking more hawkish.  

As I was watching Powell lob dovish word salad at the press conference, stumbling to find one lame excuse after another to keep the bazooka QE going without a hint of tightening, I remember mealy mouth Bernanke doing the same thing at every meeting  from late 2009 to the middle of 2013, when he was ready to unleash the taper grenade to Yellen while he took the credit for the economic recovery.  

In the bond market, we are looking at a taper tantrum light scenario, similar to 2013, except this time, the bond market is wiser, knowing that the Fed will always be late to tighten and always willing to talk down any inflation as transitory, making it less likely bonds go into full blown tantrum mode.  And if it did, I'm sure Powell would make a rash decision to placate the markets with either an Operation Twist (Bernanke playbook) or yield curve control (Kuroda playbook).  Bonds look oversold now, so probably see a bounce soon, but heading into the summer, 10 year yields probably get closer to 2%, which would probably act like the 3% ceiling did back in 2013.  

As for stocks, if rates calm down, and I expect it will, you probably don't get a big selloff until the summer, when taper talk will start to get more media attention.  And with stimulus mostly done (infrastructure stimulus probably doesn't happen until fall), the stock market probably trades sideways over the next few months.  Its gone up a long way and bond weakness is probably enough to halt its upward march.  

But you can't ignore the stimmy effect coming over the next few weeks.  Stocks are now the most popular way to spend excess cash among the masses.  Its almost like a time machine back to 1999, except this time, its not the internet revolution that's doing it, its the stimmy revolution.  Human progress has stopped, and the governments will do anything to put lipstick on this pig before the whole MMT house of cards falls apart.  This MMT honeymoon period won't last for long, in the long run, there is no free lunch from money printing.

Artifical Forces > Natural Forces

Forecasting the stock market used to be about predicting economic growth, but now its about predicting central bank actions.  The two are related, but the Fed works with a lag.  When everyone can see huge economic growth in the near future, the Fed sees it too, but try to downplay it in order to keep pumping the markets.  They want to squeeze out every last bit of their easy money policies for as long as possible until the economic data undeniably shows the growth and they can't lie anymore.  

If it wasn't obvious since the Greenspan days in the 1990s, the modern day Fed could care less about inflation or jobs, their supposed 2 mandates.  They are short term thinkers looking out for their post Fed careers.  Obviously pumping the markets and giving huge favors to bankers is in their best interest for their Wall St. backed golden parachutes.  Don't blame the player, blame the game.  When the government recklessly wields its power, the influence of politicians and central bankers becomes enormous.  

The balance of power has shifted from New York and California to Washington D.C.   That has changed the game from focusing on natural forces driving the economy such as population, productivity, wages, etc. to artificial forces of fiscal and monetary stimulus.  When heavy handed government policies overwhelm the natural business cycle, they become the driver of asset prices, not the economy.  

The market is doing its usual job of front running economic and central bank decisions by 6 to 9 months.  It is no coincidence that with the Rona vaccine rollout well underway, with expectations of the majority able to get the vaccine by summer/fall, with all the stimulus working its way through the system, the bond market saw the future 6 months from now and promptly panicked, regardless of what Powell and company said. 

When the artificial forces driving the economy begin to recede, then the natural forces become more important in driving financial markets, at least until you get the next stimulus. 

With this in mind, the only carrot remaining for the stock market is not the reopening after the vaccines, but the infrastructure bill that Biden will be pumping soon.  The re-opening is now a risk asset negative event, as it will now force the Fed to either choose between:

1. Lose their credibility and the dollar by continuing their dovish talk and easy money policies or

2. Tighten policy by talking about tapering Treasury and MBS purchases.  

Since market participants are now used to getting the baby treatment and having a tantrum at even the slightest hint of tighter policy, I am sure the Fed will go out of their way to only talk about taper, and not actually go about doing it until its way too late and the economic cycle is near its peak.  Or they could actually start to taper but do it as such at excruciatingly slow pace that the market will quickly realize that the Fed will never hike again.  

If the Fed chooses number 1, by dragging their feet and talking about inflation being transitory and about unemployment still being too high, even with blockbuster GDP growth, the stock market will love it.  That will just increase the everything bubble even more and make policy normalization that much more of a nightmare when it happens. 

If the Fed chooses number 2, they will likely officially announce a turtle taper in the December meeting, but only after trial ballooning and testing the market response like little pansies for a few months before pulling the trigger.  The number 2 option is more likely, just because the growth will be so big and inflation talk so intense that even the cooing doves like Powell will feel the pressure to ease back on the throttle.  

The Rona is the only excuse that the Fed has left.  Once Rona is in the back burner, likely as the numbers settle down to a much lower plateau after the vaccine rollout, then the pretext for more stimulus is gone and the market will have to stand on its own, which means down.  

But there are still a few months left before the majority can get their vaccine shots, so we'll likely see limited downside until the summer, SPX 3700 at the worst.  With the bond market weakness, stock strength will be more limited as well, just because the weight of the now interest rate sensitive Nasdaq is so large.  It used to be utilities and consumer staples stocks that were the most sensitive to interest rates, now its tech stocks.  That's what overvaluation and too much popularity does for a sector, it makes it more sensitive to tertiary factors it used to ignore.  

As for the Fed meeting this week, I expect Powell to be mealy mouth as usual, trying to run out the clock with a 5 point lead in the fourth quarter, trying not to do anything rash to threaten his reappointment for a 2nd term as Fed chairman.  Powell is a politician first, central banker second.  He could care less about fomenting bubbles as long as they don't crash on his watch before reappointment.  

The market probably breathes a sigh of relief and we probably hit a euphoric peak over the next few days.  I'm not interested in putting on any big short positions until the re-opening, so probably until summer time.  Until then, will mostly play small looking to capture short term moves more out of boredom rather than any big edge.  There will be a time later this year to try to catch the big down move, no need to rush in yet.

By the way, I've been writing fewer blog posts mainly because from a trading perspective, I don't see much to do here.  If I don't put up anything for a while, its probably because there is nothing to say.  The joy of trading just for the sake of trading and the ups and downs is not there for me anymore.  I've been there, done that.  Looking back, the short term trading and trying to make money every day doesn't create wealth.  I do it to keep abreast of the market, not to make any kind of meaningful money.  Its about putting on big positions at the right time, holding on and catching big moves that make the difference. 

Inflation Hype is Real

I am not usually one to get caught up in the latest market hype, as its usually more fluff than substance.  I usually take the other side when the knuckleheads on CNBC get all excited about something.  But the rising inflation isn't just hype.  WTI Crude oil over $65, highest since 2018, when everyone was talking inflation.  Corn and soybeans at the highest prices since the drought induced price spike in 2012-2013.  Copper at the highest levels since 2011.  Lumber prices more than double 2017 prices.  US Housing market is very strong as there just isn't that much supply.  Yet you have the lying government inflation statistics showing low inflation.  And the Fed and their academic cronies saying that inflation is transitory because of base effects.  These aren't base effects.  They are price surges to multi year highs.  

And the reason is simple.  When the Fed prints so much money and the government pumps out so much pork, you will have a lot of dollars looking for a home.  M2 money supply is up 25% year on year.  That is ridiculous for an economy with an organic growth rate which is probably less than 2% real.  So you have a lot of excess dollars that have no economic use, so they go to either speculation or savings.  It seems like people these days don't really differentiate much between those 2.  Those new printed dollars will chase anything, stocks, bonds, commodities, real estate, bitcoin, etc.  You are getting a big time surge in inflation that is the strongest inflation impulse since the 2006 to 2008 commodity boom cycle.  

At the foundation of money, is confidence.  If people really start to lose confidence in the US government to maintain fiscal discipline, that naturally takes away a lot of demand for dollars and bonds in particular.  The Fed and the government may think they are having a free lunch as they pump out pork stimulus after pork stimulus one after the other, but that confidence in the dollar is being eroded day by day.  

Now Biden will go on to his next pet pork project, infrastructure.  Numbers anywhere from $2 trillion to $5 trillion are being thrown around like its casino chips at the blackjack table.  M2 money supply is roughly $20 trillion.  So each of these stimulus packages (avg. $2 trillion) are diluting the existing amount of dollars by about 10%, if the Fed monetizes all of the debt issuance.  At the current pace, the Fed is buy $1.5 trillion in Treasuries and MBS per year.  The Fed has told you repeatedly that they aren't going to be the ones spoiling the party.  In fact, they are the ones who want to spike the drinks with even more cheap liquor.  

This level of pork spending during peace time has never happened before.  And if Biden is off his rocker like I suspect he is, he will keep pushing for more spending until the inflation gets so out of control that even the Fed will have to stop pretending like inflation is low and get on top of it or let the dollar get crushed.  

And what about those economist blowhards whose BS is so overflowing that no one calls them out when they use terms like economic scarring.  It seems like these BS artists come up with a new term every few years to sound like experts.  When people go bankrupt or their businesses fail, they have to go look for a job.  While they are looking for a job, they are getting very generous unemployment benefits, almost as much or sometimes even more than what they would earn when working.  That money is spent.  People with money, and there are lot of them, start new businesses when they see the opportunity after others go bankrupt and the competition is weeded out.  Those new businesses require investment, which jump starts the economy.  

There is a huge source of pent up demand looking to be released once lockdowns are eased and vaccine rollout goes through most of the population.  With all this pork, this will end up becoming the hottest economy since post World War 2.  

If the Fed does nothing for the next 6 months, which is the base case and what probably happens, by the end of the year, they will be back to where they always end up, keeping easy monetary policy for too long, ignoring inflation, and fomenting bubbles.  They will be way behind and end up with some token tapering before the cycle self combusts from the bubble getting so big that it pops spontaneously and the Fed will be back to pleasing the market with gobs of more free money.  Wash, rinse, and repeat.  Since 1998.  

The speculative juices are flowing again, as bond yields stabilize and the stimulus checks are coming over the next few weeks.   Those stimmy checks are going to be used to buy a lot of junk stocks over the coming weeks, so investors are front running the stimmy fueled dumb money.  Everyone is sucking on the government teet now.  Biden will give 'em more when it runs out. 

Powell Pause

 The stock market has high expectations for the Fed, even as the bond market is lowering its expectations. You are getting these knee jerk intraday selloffs but they don’t last for more than a day.  We’ve seen these intraday V bottoms from lower lows, one last Friday, as the end of the month stock selling and bond buying poured in, and this Friday, as the short term panic from a strong jobs number and a weakening bond market and residual disappointment from Powell not giving Wall St what it wants took it down briefly to near levels where I was waiting to buy, only to see that buying chance disappear.  

I don’t think this bounce in stocks is going to last as the bond market weakness should keep it the buyers wary.  Perhaps its investors not wanting to be left in cash as the Biden pork package gets passed this month.  If thats the case, then I expect a sell the news reaction after Biden signs the pork bill.  

There are still a few potential negative catalysts as the 3/10/30 year Treasury auctions come up next week as bond demand has cratered with crude oil and commodity prices continuing to rise as the strongest major market in the world.  That commodity market strength and strong jobs number will keep some pressure on Powell to not cave in to Wall St demands.  Although we all know he eventually caves in, its just a matter of at what point.  And it seems like Powell isn’t scared of the 10 year above 1.5% and SPX at 3800.  Probably need to get to closer to 2% 10 year and a SPX that is below 3600 for it to catch Powell’s attention.  

As for now, I am waiting for lower prices to buy either stocks or bonds.  

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

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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.