That elevated quickly. One week ago, almost everyone was expecting tariffs to be limited, and not as bad as initially feared. I heard too many fast money traders who were expecting a big pension fund quarterly rebalance from bonds to stocks. But these pension funds are complete idiots. They know that there are many that try to front run their rebalancing flows. So they probably spread out their rebalancing over several days, way ahead of the end of the quarter. It hardly ever seems like these quarterly rebalancing flows have much impact on the market.
Fast forward one week to now, and 200 SPX handles lower, and the mood is quite different. No talk of the quarterly rebalance at the end of the quarter, which is today. Nothing much has changed. Sure, Trump added some auto tariffs last week and threatened secondary tariffs on Russian oil this weekend because he was "pissed off" at Putin. But overall, its the same picture.
It continues to be amateur hour at the White House. Through the sturm und drang of headlines good and bad, nothing much has changed. You still have the same unaccomodative fiscal policy with a Powell that is just watching and waiting, probably hoping for Trump to make a bigger fool of himself with all the wax on, wax off on tariffs. Powell is in no mood to help Trump with loose monetary policy, not with the convenient excuse of tariffs being potentially inflationary.
Without supportive fiscal and monetary policy, the market is between a rock and a hard place. That's why you have so little confidence in this market, with a bounce that took 8 trading days to go from low 5500s to high 5700s, but only took 3 trading days (including today) to go back towards the low 5500s. It seems like it takes twice as much energy and effort to go up than to go down these days.
The positioning is still bad, just not horribly bad like it was in mid February, before hedge funds started unwinding their big net long exposure in US stocks. Hedge funds are back to more neutral positioning, but the slower moving institutions and real money are still in the concerned, but not selling yet stage. And retail is just horribly positioned, basically all in on stocks, thinking that stocks only go up. They have completely changed their thinking on stocks: from thinking they are a horrible investment, from 2008 to 2016, to now stocks are always the best investment in 2025.
If you look at the data from those that track retail investment flows, they have been heavy buyers of stocks over the past 12 months. In particular, since the Trump election victory in November. This high net long positioning is also seen in the CFTC COT futures data for SPX futures, showing small speculators at historically high levels.
The COT data last Friday showed asset managers re-entering their large net long positioning, buying back what they sold in March. Only to get rug pulled again in the last few trading days. Its not healthy to see asset managers so eager to put back on such large net longs in this kind of market. And the result of this offsides positioning is the nasty selloff you had on Friday.
Throughout the volatility, the bond market has relatively calm. You are not seeing a huge rally or a flight to quality that you saw in February when the SPX dropped 10% over 3 weeks. Instead, you are seeing mild negative correlations with stocks and bonds, as bonds rally when stocks selloff, and bonds selloff when stocks rally. Back in the old days, the 2010s, bonds would rally when stocks sold off, and would often not selloff or even rally when stocks went up. Those were the golden times for bond investors, as supply demand dynamics were very favorable for bonds, with QE, lower budget deficits, and lower inflation.
With the vicious selling on Friday, spilling over into the overnight market Sunday and into Monday morning, I have started a long SPX position, as the selling has gotten extreme in the short term. I am not super confident that 5500 will hold, but even if it does, I do expect 5400 to be strong support in the case of true panic this week. At these levels, it is worth a shot to try to catch a bounce once the uncertainty clears after the tariff announcement on April 2, and after the feared to be bad nonfarm payrolls report on April 4. Seasonally, we are in a very positive time of year, as April is usually one of the strongest months of the year, although last year didn't play out that way. I am not a big believer in seasonality, so I don't put much weight on it. Especially when you have a lot of capital gains taxes that are due April 15, with the big stock gains in 2024.
Whatever happens in the short term this week, I expect it be to be a volatile range in April, from 5400 to 5700 (bad case scenario), or from 5500 to 5800 (good case scenario).