Lay of the Land

Here are the things that I am looking for to time this market and predict when this monster will top out: 

1) Market positioning.  This is a combination of CFTC COT futures positioning data, asset allocation percentages vs historical averages, hedge fund positioning, and ETF flows.  

2) Duration and magnitude of the uptrend.  Intermediate term uptrends off of a significant bottom like last October usually last from 4 to 6 months.  That is not a guarantee, but a guideline.  The farther the SPX is above the 100 day moving average, the more potential energy builds up, setting up a possible big move lower.  

3) Investor psychology.  There are certain behaviors that are common as a move becomes mature and vulnerable to a correction:  more call options speculation/less put buying,  growing optimism about the economy, buying laggards and high beta names to bet on a catch up trade, etc.  

This is the current situation on the above 3 factors: 

1) Market positioning.  Here is a look at GS prime broker hedge fund equity exposure:

Net leverage is off the highs this year, and even below the highs in 2023, and still nowhere near the high levels seen in 2021.  Hedge funds are not fully invested here so there is room for a chase for performance among the hedgies.  Bullish sign for the market.

The latest COT data as of Tuesday Apr. 2 shows dealers adding to shorts, getting to net short levels that were seen from June 2021 to January 2022.  Dealers usually build big short positions after an uptrend is very mature and overbought.  They tend to be on the right side of the trade ahead of a big move, which is usually during a trend reversal.  This time, they are setting up for a big down move. But they are often early and can hold these large short positions for months as the market goes higher, like they did from mid 2021 to early 2022.  Overall, this is a bearish sign. 

2) Duration and magnitude of the uptrend.  Take a look at when you had corrections since 2018.  With the exception of 2021 (an exceptional year in many ways), you had meaningful pullbacks after 4 to 6 months of an uptrend.  

The up trend off the October 30 2023 bottom is now 5.5 months old.  This is well into the danger zone time frame of over 4 months for uptrends without a meaningful pullback.   The time bomb is ticking.  A bearish sign.  

3) Investor psychology.  No charts for this one, as this is one of the factors where screen time, watching CNBC/Bloomberg, reading Twitter and financial media are necessary to gauge investor behavior and sentiment.  The overriding sentiment now is a worry about inflation, especially after that hot CPI number yesterday.  But even before then, the primary worry was about sticky inflation preventing the Fed from cutting rates.  This has kept investors from becoming overly bullish.  The prevailing view I hear is that the market needs to pullback, it is short term overextended, but that the overall economy is strong so they expect higher prices later this year.  Despite the cautiously bullish stance I hear over and over again, the SPX refuses to really pullback here.  A bullish sign.  

A quick word on the macro situation.  The economy in 2024 is weaker than the one in 2023.  The labor market is less tight, retail sales are weaker, and GDP growth is lower.  Yet investors are much more optimistic about the economy now than they were in 2023.  The consensus view is that the US economy is strong, that we will either get a soft landing or a no landing situation, something you didn't hear much in 2023.  

The market is pricing in less than 50 bps of rate cuts for 2024, clearly running with the view that the US economy doesn't really need rate cuts and that the economy will remain strong enough/inflation will be sticky enough to keep Fed from cutting anytime soon.  The risk/reward now seems more skewed towards betting on a hard landing than at anytime since the hiking cycle started.  

Considering how much the SPX has run up this year, I would favor shorting SPX over getting long SOFR or short term Treasuries.  Also, shorting the SPX is positive carry (for futures traders) while going long SOFR or 2 yr Treasury futures is negative carry.  Those little things add up every day and make a big difference over the long run.  This is of course a more long term view, so I am still waiting for the right timing to short this market.  In the meantime, I will just make smaller tactical trades as I await for that exquisite opportunity to put on a larger SPX short position. 

Given the strong uptrend and cautious optimism that I hear and the bullish seasonal factors coming up (mid April to early May is historically bullish, and corporate buybacks comeback), I am leaning bullish for the next couple of weeks.  I am talking my book, because I did get long late last week, and will look to add more on a further dip this week around SPX 5100-5120.  This is picking up dimes in front of a steam roller, so not recommended for long term traders/investors.  

Higher bond yields could definitely be a problem if things get unhinged again like last October.  But unlike last fall, the front end is leading the selloff, or a bear flattening.  Bear flatteners are more benign selloffs as the market is signaling to the Fed that it is about to make a hawkish mistake, and can't continue to stay tight.  Last October was a bear steepener, which is the most bearish selloff you can get in bonds, as the the long duration bonds are the most interest rate sensitive.  That's when the market is signaling that Treasury supply is overwhelming demand.  Neutral to slightly bullish on bonds here, but the trend is firmly lower, and there are lots of feared events coming up (Fed, NFP, inflation data, and Fed).  Its a fear and loathing market so I would rather let the dust settle than try to pick the bottom. 

In Front of the Bulldozer

High prices and calm markets breed conditions for intense future volatility.  Well, we're getting a sneak preview of future volatility as you got a 2% selloff in the closing 2 hours of the trading day, something you haven't seen for a long time.  Some people will blame 0DTE options for the move, but its the complacency that's been building up that sets the market up for these cascade moves lower. Moves like this actually reduce the overbought conditions quickly and flatten out the uptrend, making them more sustainable in the intermediate term. 

For trend followers in 2024, it has been heaven.  For countertrend traders, it has been hell.   Valuations are getting unhinged from the realities of higher discount rates.  Yields are going higher along with stocks. 

Will we go back to the old normal of yields in the 4-6% range like you saw pre 2008?  It depends on fiscal policy.  If the government ignores the deficit and keeps growing the the deficit to GDP ratio to even higher numbers, then you will.  We could be back to a higher plateau for Treasury yields along with higher, sticky inflation.  Fundamentally, the U.S. is becoming a more closed society, with the population wanting less immigration, while wanting more government handouts and low taxes.  This leads to ever growing budget deficits, as politicians will always do what is popular.  Fiscal stimulus and low taxes are popular.   These loose fiscal policies will continue.  In the long run, the large fiscal deficits and the lack of supply growth for labor will lead to higher yields.

With Trump likely to win the White House in November, you get a scenario where a Republican president and a Republican or Democrat Congress produces big budget deficits.  The only combination which has proven to lower budget deficits in the past is a Democrat president and a Republic controlled Congress, and that looks extremely unlikely in 2024.  So more fiscal pump to come in the years ahead.  

But this isn't really an edge.  It's consensus.  Almost everything I read and hear is that the US is entering an era of fiscal dominance, where monetary policy has little effect on the economy compared to fiscal policy.  Now almost everyone thinks recession is unlikely because of the big budget deficits.  But I question whether big budget deficits lead to sustained economic growth.  Just taking a look at the big budget deficits in Japan and the low growth there over the past 30 years, public sector borrowing can crowd out private investment and lending.  You have actually seen some of that in 2023 with bank lending flattening out to no growth, which is unusual in a non-recession.

Lately, the market has run with the fiscal profligacy and government debt fueled boom thesis by selling Treasuries and buying stocks and commodities.  The Project Argentina end game is the right long term thesis, but is it the right short to intermediate term thesis?  The US dollar is still the reserve currency, and its not going to be easy to move to another form of money for global trade.  For example, hard money like gold or even bitcoin are too supply constrained and not what central banks want as the main form of money.  The politicians would never let it happen and would lose too much power in the process.  For now, the Fed still has some inflation credibility by keeping rates high for the moment.

The market is fixated on sticky inflation, and a belief that the US economy is strong, and that the Fed is too dovish.  Thus the rush into commodities and stocks. Looking at the price action, this belief appears almost fully priced into the market.  There is almost no talk about a hard landing or the lagged effect of 5.25% of rate hikes.  You heard that constantly in 2023, when recession was a big concern.  Now, with the real economy slower than it was last year, you have more optimism on growth.  But as I've mentioned previously, Wall St. overestimates the wealth effect from higher stock prices.  There aren't many out there selling stocks at high prices to consume more goods and services.  Those with the largest equity allocations are mostly the wealthy, and their propensity to consume more based on higher stock prices is low.

You have a bifurcated economy, with the rich doing well, and the poor and middle class not so well.  Inequality helps to keep the inflation somewhat under control, since the poor and middle class have the highest propensity to consume their income.  A less prosperous lower 50% is a brake on inflation.  And wage income is growing slower than inflation, despite the BLS making up the inflation numbers to make it appear lower than it actually is.   

This explains the dichotomy of a surging stock market but a low approval rating for Biden.  Most people aren't doing well, no matter how much Wall St. touts the US economy as being strong.  The Wall St. economy is strong, not the real economy.  The real economy is mediocre at best, and growth is overstated since inflation is understated.  

This week, we've finally got a pullback that lasts more than 2 days.  The market selloff started 4 days ago and is now down more than 2% from the highs.  That doesn't sound like a lot, but we haven't had a 2%+, 4+ day pullback in the market since early January.  Its been 3 months since we've seen this type of price action.  That 4 day pullback was a spring board to a huge rally in the 1st quarter.  I don't expect this pullback to lead to a rally anything like that with the market so much more extended.  

But when you haven't had a 2% pullback in such a long time, that pullback is usually bought up quickly and you go right back to the previous highs or close to the highs within weeks.  That is my base case for the current market, and I've actually done the unthinkable and bought this dip in SPX for a trade, expecting higher prices in the weeks ahead.  This a purely tactical trade, and not recommended for long term investors/traders.  Still believe the market will have a much deeper pullback in the coming months, although we may go a bit higher before that happens.  I continue to see many investors who are looking for a pullback and who have gotten nervous this week because of either higher yields or higher oil prices.  I don't expect either of those trends to continue for much longer.  Its the geopolitical bid that's squeezed oil higher recently, and geopolitics is almost always a fade. 

Perpetual Boring Machine

The SPX is a perpetual motion machine that goes up in a 30 degree angle on the charts.  The last 5 months would be a textbook example for a book on trend following.  Yet I still plenty of fast money traders reluctant to embrace this rally, to get bullish and excited.  There are still lingering fears about sticky inflation and doubts about how much the Fed can cut in 2024 and beyond.  And the technical traders are still complaining about how there's been no pullback, which makes the uptrend "unhealthy".  You continue to see stubborn short sellers take shots at this market, thinking that a correction is due, and they just keep getting squeezed on the next rally to all time highs.  

Last week, OCC data on buy to open puts vs calls showed higher put activity than the week before even as the market kept going higher.  There were net negative deltas for SPX, SPY, and QQQ options for most of last week, so options traders were reducing long exposure.  Even with the dovish FOMC announcement and the breakout to new all time highs.  There continues to be profit taking and hedging in the options market.  

In a sign that some investors are slowly adding back long exposure, asset managers added to their net long position in SPX and NDX futures last week after reducing exposure for the past two weeks.  Net SPX futures long positions are basically flat since the beginning of the year, despite the SPX having gone up 500+ points during that time frame.  The last time you saw a pattern of the SPX going up so much with asset manager net longs staying flat was from January to May 2021, and July to Dec 2021.  Before that a similar pattern was seen from May 2017 to December 2017. 

We have yet to see overt signs of excess speculation or euphoria in the futures and options market.  This reminds me of the late 2017 market when the volatility died down, the market kept grinding higher, yet you didn't see a lot of speculation or investor excitement.  That market was also led higher by tech stocks.  That late 2017 was characterized by low vol, options selling to collect premiums, and shorting VIX to collect positive carry as the VIX curve was in steep contango.  If things play out like late 2017, then we could have several more weeks of a grind higher into a monster blow off top, like what you saw in January 2018.  It would be mind boggling to see, but it cannot be ruled out considering how little Powell and the Fed seem to care about loose financial conditions or a bubbly stock market. 

So what is the plan for this bubble?  The original plan is in the scrap heap, as a top in late March seems very unlikely based on current conditions.  The rally off the late October low is now 5 months old, so we are now in the danger zone where the market is vulnerable to a correction.  But we've seen longer rallies without any meaningful pullbacks, such as in 2017 and 2021.  In fact, based on current futures positioning, volatility, and investor psychology, those analogs are quite relevant for this market.  If in 2024 does play out similarly to 2017 and 2021, you probably have just one decent correction (5-10%) all year.  That would be a brutal market for a short seller.  Still leaning towards a more bearish picture for 2024 than either 2017 or 2021, but the data doesn't support that view.  

Its easy to fall into the trap of putting on positions based on the market that you want, rather than the market that exists.  I'd be thrilled to put on shorts into an overvalued bubble market that looks to be topping out and make a quick score with little heat.  But that doesn't fit the reality of the situation which is a strong bull market that doesn't give dip buyers any good opportunities to get in.  

Despite the sky high valuations, you haven't seen the excessive optimism that you saw in late 2017/early 2018 and most of 2021.  Even a dovish Powell in the face of higher than expected NFP, CPI, and PPI numbers didn't get investors excited.  You can't force trades as a short seller in a raging bull market.  Being super selective is the only way to survive for those with bearish leanings.  As for longs, playing musical chairs and buying after 5 months of a relentless rally is just not a great risk/reward situation.  Even though I expect SPX and NDX to keep going higher.  Sold the rest of my bond position.  Its boring, but keeping powder dry and waiting for better signals.

Waiting Game

Many people were surprised by how sanguine Powell is about inflation despite the hotter than expected CPI and PPI over the past 2 months.  Powell basically telegraphed his views in front of Congress a couple of weeks ago.  His default position is to cut 3 times this year, and to start in the summer.  Its going to take a lot of bad inflation data and hot jobs numbers to get him off that position.  

The knee jerk reaction from looking at a soaring stock market is that Powell is making a mistake by making financial conditions too loose.  But investors basically are living in a bubble of their own making.  For investors, the economy is secondary in importance to the stock market.  Since the SPX is making new all time highs on a regular basis and is on a rocket ship higher, investors think the economy is doing just as well.  Because they are getting richer.  But if you get down to the real economic numbers, its a mediocre economy.  Full time jobs are in a downtrend, something usually seen right ahead of or in recessions.  Retail sales are also flattening and going lower.  

I hate to admit it, but Powell made the right move to not waffle on his original position of cutting 3 times this year, even though you got hotter inflation prints.  The real economy is just not as strong as the stock mongers will have you believe.  

The most common reason I hear for continuing strength in the economy is the large budget deficits and fiscal dominance.  There is a bit of truth in that, but a lot of that fiscal stimulus is being offset by both the reduction in the Fed balance sheet and the reluctance of banks to lend and businesses unwilling to borrow at high rates.  Loan growth is non existent, and much of the fiscal budget deficit now goes to paying interest on the debt, which is money that mostly flows to the rich, who have a high propensity to save rather than consume that interest income.  Before 2020, a big portion of the increase in money in circulation was coming from increased bank lending.  That money was going to high propensity to consume/invest borrowers which boosted the economy more than the current setup of force feeding high interest to buyers of Treasuries and money market funds.  

Big fiscal deficits are not a cheat code for strong economic growth.  Unless its accompanied by central bank bond buying, it leads to crowding out of private borrowers via higher yields.  

That is why this bubble in the SPX and NDX is so puzzling.  Bubbles usually happen when the economy has been hot and growing rapidly, not when investors are confident in a soft landing and lower interest rates in the future.  But the high valuations, investor psychology, and rampant speculation in AI and bitcoin show we are clearly in bubble territory.  While bubbles usually end badly, they go on for longer than any rational person could assume.  Its why I've been cautious about shorting this market.  To short a super strong bubble like this, you need almost everything to line up perfectly to put on a good risk/reward short where you don't have to take too much heat.  Entering shorts too early and taking heat in this type of  market is asking to get squeezed and stopping out at the top.  

Here are some missing ingredients for a top which I am still looking for:

1) Asset managers in the COT data getting aggressively net long SPX futures.  While they are quite long, they have been reducing long positions as the market has been going higher.  That's not an ideal short setup.  

2) More good news from economic data.  You need to see the CPI and PPI numbers coming down, and coming in below market expectations.  SPX has been marching higher despite bad inflation numbers.  You want to see good economic data, Treasury yields going down, excessive optimism, and short term overshoots.  These bad inflation numbers are keeping investors somewhat cautious, which is not a good setup for shorts.  

3) Fewer investors looking for a pullback.  Some of the most reliable contras on Twitter are fighting this rally, and looking for a correction, which keeps me away from shorts at the moment.  I want to see more investors embrace this rally as it goes higher.  Not seeing that yet.  

From a long term perspective, this stock market seems nuts but you have to be data driven and process oriented.  The data is still not overwhelming enough for me to get short, and it may take longer than I originally expected (late March) to reach the top of this move.  We may need to see some more favorable economic data / higher confidence in the Fed cutting 3 or more times this year to get the euphoria needed to form a top.  That means we could be waiting till mid April to early May before we top out.  I'll let the data and positioning guide my views.  Definitely not going to take a stand here just because the SPX is higher than my initial price target to start a shorting campaign.  Powell gave the green light for further speculation with his dovish stance.  That could be the catalyst to get more investors excited to form a blowoff top.  Waiting for it patiently.  Still long bonds, but will trim some if they rally further in the coming days. 

Ripe for a Conflagration

The conditions are getting closer for a raging inferno.  The weeds have grown like mad, with no fires to keep the growth in check.  The Fed and US government are complacent, confident, and content with no major blazes in the past year.  In particular, US politicians have passed the buck and blamed inflation on everyone but themselves.  Same with the Fed. 

Looking at the SPX chart, we are in the late stages of a blowoff top.  The launch angle of this rally is getting steeper, with limited consolidation.  Ever since the market blew through 4800 in mid January, its been a steady, epic run, going up almost 400 points with no pullbacks lasting more than 2 days for the past 50 days.  Let's look back at some past parabolic rallies that made new all-time highs with hardly any pullbacks.  Maybe we can find a pattern.

May 2013 top

This one was a minor blowoff top, as the buildup wasn't that extended and there wasn't the euphoria or speculative excess seen in other parabolic moves.  The trigger for the drop was a sharp rise in bond yields in May/June.  The selloff only lasted a few weeks, and it was followed by further rallies throughout the year to make for a huge up year.  

 

January 2018 top

This was a significant blowoff top, when VIX selling became popular as the VIX went under 10.  In the final stages of this top in January, you can see the uptrend getting steeper.  The post Trump tax cut euphoria as well as the relentless uptrend in 2017 got investors complacent and greedy in early 2018.  A huge spike in the VIX caused the short VIX ETN XIV to get liquidated in a panic.  There was no news catalyst, the market just collapsed on itself.  The market traded sideways to higher for the next several months.  

 

February 2020 top

Who knows how much further the rally would have gone without Covid, but the market was vulnerable to a selloff as a breakout above 3000 in October 2019 resulted in a 10+% rally making all time high after all time high for over 3 months with hardly any pullbacks.  Even without Covid, the market was ripe for a decent correction.

 

September 2020 top

This was a minor blowoff top to new all time highs, 5 months after the Covid panic bottom.  This rally was led by tech stocks and the speculation was quite hot in Nasdaq names.  There was no catalyst for the selloff, although there were rumors of Softbank buying calls on QQQs and big cap tech stocks which could have caused a short squeeze in late August/early September.  

If you go back farther, there are other instances of parabolic rallies in SPX, most of which ended with sharp pullbacks.  On occasion, there were mild pullbacks with a several week consolidation period to digest the gains and get investors used to buying at higher prices.  But those were the exception, not the norm.  The general pattern for these parabolic rallies when they end is a sharp, steep pullback, not a gentle, calm selloff. 

The intermediate term(1-2 month) risk/reward is now getting more skewed to favor shorts over longs. At current levels, shorts are likely to only lose a small amount if wrong, but have possible big gains if right.  On the other side of the coin, longs are risking big losses with small possible gains. Yet, despite conditions becoming more favorable for shorts than longs at the present time, I expect them to get even more favorable, i.e., a bit more of a rally higher before the correction.  You still have CPI coming up and the Fed meeting next week, and I expect both to be fuel for bulls to get more bullish.  Expectations seem to be leaning for a hot CPI number, as many are still in the strong economy, sticky inflation camp.  Market pricing has come down quite a lot for rate cuts in 2024, with less than 4 rate cuts priced into the SOFR curve.  That gives a lot of room for more cuts to get priced in if the data gets soft.  The crowd seems to have fully bought into the soft landing, even some no landing scenarios and the STIRs pricing reflects this. 

There is a fly in the ointment for the bear case.  Looking at futures positioning from the COT data, you have seen asset managers pullback from their extreme net long position in the past few weeks, despite the SPX going higher during that time.  This is a bit unusual, as asset managers are usually adding to their net long positions as the market goes higher.  

SPX Net Positions for Asset Mgr and Dealers

Asset manager net longs were highest on Jan 30, when SPX was at 4951.  With SPX at 5085 on Mar 05, their net long position have reduced by 51K contracts.  You can also see dealers reducing their shorts from early January to March 05.  For the best shorting opportunities, you want to see asset managers getting longer and dealers getting shorter as the market goes higher.  Either a speculative blowoff top with steep gains in the coming days or asset managers getting longer/dealers getting shorter in the upcoming COT reports will provide more confidence in putting on shorts.  

On Friday, we got a little glimpse of how fragile this market is with NVDA trading in a 100 point range on no news, as it sold off hard from extreme overbought conditions.  The air is thin up here, especially for the most speculative AI related names.  You can smell the dry tinder getting close to the smoking point, before you get the huge wildfire.  There is a lot of dry underbrush that's been growing wild since the last fire, providing the fuel for the next conflagration.   

I am still sticking with my late March/early April top prediction.  You still see analysts on CNBC and Bloomberg fighting this rally, being cautious, which makes me wary of putting on shorts at the moment.  I need to see asset managers all in on the long side before I go all in on the short side.  Until then, I would only put on a small starter short position and nothing sizeable.  Still long bonds, which I will look to close out in the coming weeks.

Tight Corporate Spreads

For those looking for an immediate bear market, its quite unlikely.  Corporate bond spreads are getting tighter over the past few months.  Ahead of previous bear markets or near bear markets (Aug 2015, Dec 2018), corporate spreads always were widening before the SPX downtrend started.  

There are 2 exceptions however:  2011 when corporate bond spreads were already historically elevated before going even higher and 2020 when Covid happened.  So based on this alone, it looks quite unlikely that there will be a credit event that triggers a big move lower in SPX.  It doesn't preclude a short term panic lower like late Jan-Feb 2018, when corporate spreads were tightening but SPX went down big anyway because the index was massively overbought and going parabolic.  

Despite tight corporate spreads, I am a believer that SPX upside is limited given current high valuations, the length of the rally (4 months since the last meaningful bottom), and future prospects for growth (poor). 

Usually what happens in a market like this is the market grinds higher, and suddenly, there is a sharp pullback, which causes corporate spreads to widen, with Treasury yields going down.  Then, the market recovers the losses from the pullback as the crowd expects the Fed to turn dovish, and yields stay lower, and corporate bonds don't tighten as the SPX rallies from the pullback.  This is what happened in 2000, 2007, and 2015.  

Last week's blowout earnings from NVDA has helped to keep the parabolic trend intact, and its still a stock that I would avoid shorting given its strength relative to the market.  I am a non-believer in the AI hype, and the current investment spending on AI from venture capital to big tech will likely fizzle out sooner than people expect as the return on that investment will be poor.  The only real immediate impact from AI is its use in graphics, and that market is not big enough to support all this spending.  Once big tech realizes that AI is more like the metaverse than the internet, they will do what META did a few years ago and stop spending.  The biggest beneficiary of that AI spending is NVDA, so you can guess what will happen to NVDA's stock when that spending contracts.  

With regards to the current SPX rally and when it will top out, my best estimate is late March/early April.  These strong rallies usually go on for 4-5 months before a meaningful pullback, and this one will probably lean more towards 5 months because the current price action is not indicative of a topping market.  What you need to see is more optimism about the Fed (with bond yields going lower) to get the excitement and euphoria going.  That's still missing.  I don't see this market going into a sustained downtrend based on a hawkish Fed.  You need to see weaker economic data (lower jobs, lower inflation) to get the bond yields lower and higher anticipation for lower rates.  Only after that happens, along with another few percent move higher in SPX can you think about shorting this monster.  

Reduced my bond position, but will increase it again if I see yields go a bit higher.  Still think the next big correction in the SPX will be accompanied by bond yields going lower, not higher. 

Hot Air Balloon

The balloon keeps floating higher, the view gets better and better.  But remember, this balloon is floating up on hot AIr.  AI is the hot gas that keeps this going up and up.  Eventually the balloon will run out of gas.  

For much of January, we began to see divergences in the stock indices, as the haves (mostly tech growth stocks) kept going higher, while the have nots (most of the remaining sectors) went lower.  We also saw the stock/bond correlation break down, with stocks going higher even as bonds kept going lower.  Last week, the higher inflation prints finally put a little crack into the stock market.  Although being down 1.5% from all time highs isn't much, looking at the big picture.  Especially after the run the SPX and NDX have had over the past month.  

But the speculation and complacency are building.  Look at the 20 day moving average of the ISEE call/put ratio (buy to open orders only), its at the highest levels in the past 5 years, which includes the most speculative market I've ever seen (2021).  Its maintained this high level since late December. 

And the poster child of this market's speculative froth:  SMCI.  It went parabolic going into February opex as the options speculation went through the roof, and we got one of those bubble blowoff tops.  

The high call options activity, the optimism about the US economy and AI, historically high valuations, and a Fed that is on the cusp of an easing cycle are all dry tinder for the upcoming fire.  All you need is one drop of a match to light a huge blaze in the market.  The bulls will say that there is no better game in town, that the US government continues to run a high pressure economy with big budget deficits which feeds into corporate profits, and that fiscal dominance makes tight monetary policy less relevant.  I would agree if those big budget deficits were happening along with strong growth in bank credit/lending, but its not.  The US government has effectively crowded out the private sector with its inflationary deficit spending which has raised interest rates to the point that the private sector has pulled back on borrowing.  And many banks are stuck with bad MBS and Treasury supply bought at low yields a few years back, and are in survive not thrive mode.  Both the government and the private sector were on a credit binge from 2020 to 2022, and while the public sector has continued on since 2023, although at a lower, but still high level, bank credit growth has stopped growing.    

When the government takes over the role of increasing the money supply rather than private enterprise, you naturally have less productive use of the new money that's created.  That's ultimately creates an inflationary structure to the government dependent growth model that the US has embarked on since 2020.  With an inflationary structure, yields naturally go higher and stay higher.  We are still in a disinflationary cycle because of the lack of new credit from the banks, and due to most of the deficit spending going towards the old and rich, who have a lower propensity to consume their extra cash than the young, poor, and middle class.  But if we get the banks lending freely after the Fed has cut rates to more palatable levels for small business (<3%), then you will get another inflation wave as the underlying cause of the inflation hasn't been addressed.  

No, we are not going back to world of low inflation, ZIRP forever, and TINA investing.  With higher inflation comes higher bond yields, and more opportunity to get yield without taking equity risk.  There is a lot of private lenders who are getting 8%+ yields for relatively safe credits with good collateral.  The extra competition for cash in a higher inflation world will put a lid on stock valuations.  It makes little sense to pay a 25 P/E for stocks when you can get 8+% in much safer investments.  People forget that loans/bonds are higher up on the capital stack than equities and thus usually offer lower long term returns than equities.  The way equities offer better long term returns than bonds/loans is through lower valuations, not higher.  

With US population growth running around 0.5% over the past several years, with an aging society and a labor force that's growing less than the population, there isn't that much organic demand for credit.  Why would a small business borrow money at high rates to make investments when its business isn't growing nearly as fast as the borrowing rate?  The tight labor market is a function of a workers to population ratio which is falling, not a strong economy.  You can't even compare the US to where it was 25 years ago, during the dotcom bubble.  The demographics were younger, the population growth was higher, and deflationary wave of cheap, high skill labor in China was just getting started.  Now its an inflationary wave of less domestic labor, less cheap overseas labor, older population and less population growth.  All negatives for economic growth.  Yet you have so much optimism about the economy and the stock market at near all time high valuations.  These are almost ideal conditions for a long bear market.  At best, these are conditions that lead to a long term sideways market with minimal capital gains for equity investors for the next several years.  That is the big picture view of the current market.  In the short term, its more random but there are intermediate term signals mentioned above that are flashing amber lights.  

Still a stuck long in bonds, which I will hold until I see a better setup to short stocks.  NVDA earnings are coming after the close today.  No lean on that, neutral on the name.  I still think this AI bubble has one last burst higher left in it, it could come after the NVDA earnings, or it could come in the spring.  But the bubble isn't at the popping point by looking at what I see in the financial media.  From this point onwards, the big money will be made in shorting stocks in 2024, not being long stocks.  But timing is always tougher on the short side so waiting for more ideal conditions and for the rally to get a bit older. 

Feast or Famine Business

Trading is not a steady income business.  Those that try to make it a source of steady income like a normal 9 to 5 job usually go the daytrading/scalping route.  Without a doubt daytrading has the highest failure rate of all forms of speculation.  There just aren't many edges out there on a day to day basis.  The edges which do come regularly are dominated by HFT firms which easily beat out retail traders.  If you are a retail trader, its an act of supreme overconfidence and hubris to think that you can outscalp these HFTs which specialize in front running and being the first in line on the bid and offer queue.  Not to mention the slippage and transaction costs add up quickly the more often you trade.  

Trading is a feast and famine business.  Its usually long periods of famine with brief periods of feast.  Those that try to make steady income during the long periods of famine are trying to squeeze water out a rock.  Those that are satisfied with making a steady income during feasting periods are minimizing the opportunity set available during those good times, making a little when they could make a lot.  If you have been in this business long enough, you get better at recognizing what are tough trading markets and what are good trading markets.  

Usually, the more volatile the markets get, the better it is for trading.  The main reason for this is because markets often get volatile when investors are losing money and panicking out of positions.  Predictability correlates with volatility but not always.  Sometimes you get volatile markets that are unpredictable.   For example, the bond market in 2023 was quite volatile but were hard to predict (Silicon Valley Bank going bust in March, long end panic in September/October).  I remember seeing rampant call buying in TLT into a strong downtrend, thinking that it was unlikely so many options punters would make money buying in a market so weak.  But they were right, which is uncommon.  

Right now, people are making money, volatility is calm, and investors are not panicking. Its a tough trading market.  But I stay in the game, keep watching the markets, put on trades, not trying to hit home runs or make steady income, but to get a feel for when its about to get good again.  What trades I make during these tough times are probably slightly negative expected value (EV).  But observing the market and making trades helps with timing the next big trade, the time when the markets get good again, when there are many positive EV trades.  

Usually the longer the famine, the bigger the feast on the other side.  While 2023 was a good market for investors, it wasn't a great trading market.  Especially for those with a bearish lean.  For those natural born bears out there, its about to be your time again.  We have the ingredients for a bear market lining up.  

1.  High valuations and large asset allocations towards equities among individual investors.

2.  Investor optimism and complacency about the economy.  Soft landing consensus.

3.  A bubble in AI with greedy investors bidding up other high beta assets like bitcoin.

The rally off the late October low is now 3.5 months old.  Looking at past strong rallies like this off of V bottoms, the average length of the rally is from 4 to 5 months.  So we are getting close to the end of this bull run.  From a price perspective, this rally has exceeded my expectations.  But that just makes for a even more lucrative short setup in the coming weeks.  This is opex week, and with how relentless the uptrend has been, you are setting up for a Friday opex day climax top.  I don't expect that to be the final top of this rally, but a 3 to 5 day post opex selloff coming off that climax top would not surprise.  Something similar to what happened after June 16 2023 opex. 

The goal now is to keep a close eye on the market and participate but not lose too much money while waiting for the good times to arrive.  Still long bonds and waiting for a climax top to short SPX.  The AI bubble keeps growing, but its still too strong and too early to short.  We have NVDA earnings next week, which could serve as a catalyst for the final blowoff top in the name.  The sharpest moves occur at the late stages of a rally, so timing is everything when it comes to trying to pick tops in bubbles.  I would like to see more 2nd tier and 3rd tier AI bubble plays flying higher to get more confidence that a top is near.  We haven't seen that yet, so holding my fire for now.  The AI skeptics are mostly gone, and nearly everyone believes is will be a huge breakthrough technology, almost like the 2nd coming of the internet.  This usually the parabolic phase of the bubble where the sharpest moves higher happen.  Probably in the 7th or 8th inning of this AI bubble, so not much time left for those playing that game.  

Crocodile Jaws

The jaws are widening.  SPX keeps going up, and the Russell can't keep up.

The Russell 2000 lagging the SPX is getting egregious.  The market is splitting wider and wider, into a small minority of haves, and a majority of have nots.  We also got 2 more Hindenburg Omens on the Nasdaq in the past week.  That's a total of 5 Hindenburg Omen signals year to date.  When you see a cluster of these Hindenburg Omens show up, its a warning shot that the rally is on borrowed time.  It can pullback right away, or it can pullback in a month, but there is usually a correction within 2 months at the latest.  

Russell 2000/SPX ratio

 

We are also seeing asset managers get more aggressive in adding SPX futures long exposure, as we are now at a 52 week high in asset manager net long positioning.  Dealers also got more short, although not at 52 week lows in positioning.  These are not outright sell signals, as rallies in bull markets can last for several months without a correction.  But this adds to the weight of evidence tilting the odds in favor of a down move over an up move in the next 3 months.

SPX Net Positions of Asset Managers and Dealers

 

Two main things we learned over the last week: 1. Powell is going to try to delay rate cuts into at least May, if not longer 2. AI tech bubble is getting even bigger.  

Powell is getting brainwashed by all the soft landing talk, about how its too early to cut in March from the investment community, and he followed through.  Powell is known for lacking backbone, and he proved it once again, going with what Wall St. wants.  Even when acted like the second coming of Volcker in 2022, it was only because Wall St. was going crazy over inflation and he had to do something about it.  So Powell will let these higher rates deal a bit more punishment to small business.

NVDA is now over 700.  META went up nearly 20% in one day.  The breadth is getting narrower as the haves keep roaring higher, and the have nots just stagnate or drip lower.  One thing you have to realize about big tech stocks like META, GOOG, MSFT, AAPL, AMZN, NVDA, etc. are that they are not a net positive for other companies.  They are a net negative.  Big tech stocks back in the old days used to be drivers of economic growth.  Now they are just rent seekers, parasites trying to push profit margins up as high as possible, seeking the maximum point on the profit curve.   

META raising prices on ads, reducing or completely eliminating exposure for non paying accounts in favor of accounts paying the most ad money to Facebook/Instagram.  META is trying to squeeze out as much ad money from their customers to the crying uncle point, because there are almost no alternatives in internet advertising.  GOOG doing similar things, although not as egregiously as META.  AAPL pushing out the same phones with just slight tweaks and charging more for it because their customers are addicted and/or don't know how to switch to Android.   NVDA selling overpriced graphic cards and trying to bundle it with other services which are also overpriced.  These companies are becoming kings of rent seeking, not innovation.   MSFT and AMZN are basically a data center duopoly, and can push up pricing at will because its such a huge pain to go from outsourcing to making and running your own data center.  

There is such a huge bubble in AI, where the hype is so thick that big tech companies are shooting first (investing in AI) and asking questions later.  They don't have the slightest clue on how they will monetize whatever they develop with AI, but it sounds cool, and Wall St. loves it, so they keep doing it.  NVDA is the main beneficiary of this shoot first mentality, but how long does this last for?  Will companies continue to send billions to NVDA for overpriced chips to build up their AI capabilities when its all just money going down the drain?  I know this sounds like a crazy comparison, but the AI craze reminds me a bit of META going bonkers about the metaverse back in 2020 when people were holed up in their homes.  We know how that ended up.

This bloated Mag 7 led rally is just rotten at the core.  There is no natural economic growth behind it, just some additional deficit spending that puts a few more dollars in the pockets of the rich, the elderly, and lobbying companies.  The current misallocation of capital from nilly willy government spending will haunt future generations.  They all say how the economy is so great because of all the job creation.  But they forget to mention that part-time jobs are where the growth is, and its coming from the poor needing 2 jobs to get by.  Tax withholding data so far this year is showing total wages basically stagnant on a year over year basis.  That data is much more reliable than whatever surveys the BLS uses to measure NFPs.  Yet when we got the big jobs number on Friday, the Wall St. crowd went into a tizzy, celebrating the great unstoppable machine that is the US economy.  Such a great US economy that small cap companies are massively underperforming large cap ones. 

The market is slowly grinding to a top, but the last missing ingredient is the excitement and exuberance you often see at tops.  I see less denial than a week ago, but there is not the typical exuberance that one would expect at market peaks.  Timing cycle patterns for the SPX still give this rally about 4-6 more weeks to run.  So I'm reluctant to get short SPX/NDX until I see more overt signs of a top.  I am still long bonds, and investors are overreacting to the nonfarm payrolls and Powell's reluctance to cut rates anytime soon.  The bond market will rally big not when Powell decides to cut, but when the data and market conditions urges him to cut.  We are not there yet, but with how bubbly the SPX is, I wouldn't be surprised to see a big risk off selloff in stocks coinciding with a strong rally in bonds in the coming months. 

Fighting the Last War

People tend to extrapolate the stock market to the real economy. 

When the stock market is strong, the economy is considered strong.  When the stock market is weak, the economy is considered weak.  The stock market is strong.  The SPX is around all time highs.  So right now, the bias in the investment community is to be positive on the economy.  But its clear that the economy is slowing.  If the economy was so strong, why would unemployment rates go up in so many states?  Why isn't the Russell 2000 stronger than the SPX in an up market?  The Russell 2000 usually outperforms when the economy is strengthening.  

Russell 2000/SPX ratio

The signs are there that the economy is slowing.  But all I hear on CNBC is how the economy is strong enough that the Fed doesn't need to cut, that too many rate cuts are priced into STIRS.  But that's flawed logic.  The market rallied strongly in November and December because of increased rate cut expectations, not in spite of them.  If you take away those rate cuts priced into STIRs and the rest of the yield curve, then the stock market weakens, and financial conditions tighten.  

I rarely hear anyone say that the market pricing is about right, or that its not pricing in enough rate cuts because the economy will weaken in 2024.  People are fighting the last war, inflation.  There are more people worried about inflation re-igniting than about a hard landing.  I still hear talk about how Jerome Powell doesn't want to repeat the mistake of cutting early like Arthur Burns.  Are we still in 2022?  I thought we found out a while ago that Powell is no Volcker.  Disinflation is likely to continue.  There are so many biases built into the CPI and PCE that understate inflation that's its not easy to get high inflation numbers showing up in the government stats.  With the lagging effect of lower rents feeding into owner equivalent rents in the CPI, expect inflation to slowly go down over the next few months.  

As for the jobs market, its hard to keep getting big jobs growth when the working age population is hardly growing.  The post Rona catch up hiring done from 2021 to 2023 is behind us.  Yes, the jobless claims numbers haven't gone up, and NFPs are still showing solid job numbers, but government tax receipts are weak for January, month to date. 

You have seen quite a few layoff announcements this month.  Its nothing alarming, but companies usually don't do layoffs if they think the economy is strong.  

Could it be that the effects of the Covid stimmies are starting to wear off and the lagged effect of 525 bps of rate hikes are starting to slowly kick in?  I heard so much talk about the lagged effect of Fed rate hikes in 2023, but now, when they should start to kick in, its crickets.  Higher interest rates work quickly in the financial economy, but they work slowly in the real economy.  Even if the Fed cuts 125 bps (what is priced into Fed funds futures for 2024), that doesn't really stimulate the economy.  Its just less restrictive.  It wouldn't  keep the stock market from going down, if god forbid, we actually got this bubble market to pop and go down.  125 bps of cuts would still keep real rates positive, and 5 year corporate bonds would still be rolling over at more than 200 bps higher yields than 2019.  

The Fed doesn't usually mess around with 25 bps paper cuts when jobs numbers are getting weak in a disinflationary environment.  The Fed took its time in 2019 to cut because rates weren't that high, and the economy wasn't that weak.  This time around, real rates are much higher, monetary policy much tighter, and I would argue the global economy is weaker now than back then.  Back in 2019, at least you had Europe and China that were relatively strong compared to now.  Those countries help contribute to disinflationary pressures for goods in the US.  

I wouldn't be surprised if the Fed funds rate was below 3% by year end.  That's 250 bps of cuts, most of which would come in the form of 50 bp increments.  I could see the Fed doing 25 bps/meeting for 2 meetings in the spring, realize that its too little as stocks continue going lower, NFPs continue coming in weaker, forcing them to up the pace to 50 bps/meeting until year end.  If they start in May, they could cut 250 bps in 6 meetings in 2024 under that scenario.   I see that as being much more likely than the Fed dot plots of 3 rate cuts for 2024 as the economy just hums along without any worries.  

We got some geopolitical worries hitting the overnight markets as crude oil went up, but has since settled back towards unchanged.  Crude oil already rallied the past few days going into the weekend ahead of potential Middle East risk, so its not that surprising that there was little reaction from crude oil.  After the trauma from higher oil prices in 2022 after the Russian invasion Ukraine, you still see overreactions to any piece of news coming out from the Middle East.  Geopolitics is now always considered a concern for investors, even though it had no real effect for the two decades prior to 2022.  

Its a heavy event week with big tech earnings lined up, QRA and FOMC on Wednesday, and nonfarm payrolls on Friday.  With the SPX in a strong up trend going into these events, I don't expect much selling after any of these events.  If there is a dip, it will be brief and immediately bought up.  As is typical for an event packed week in a strong uptrend, the odds favor the bull side for both stocks and bonds.  I bought some bonds late last week, looking to hold for the next few weeks.  No position in stocks at the moment, but the COT data came out bullish with dealers covering shorts into the rally, and asset managers selling.  It jives with what I am hearing on CNBC, which is skepticism about this rally.  Its going to take time to form a top, definitely not seeing signs of a top yet in the positioning data. 

Split Market

Its a tale of two cities.  The haves and the have nots.  The tech stocks are doing great. The rest of the market has been mediocre.  In particular, small cap stocks have been lagging badly.  Tech stocks are the anointed ones in this environment, as they are valued based on AI hype and its halo effect, while the rest of the stock market has to deal with reality.  The reality is that the fundamentals and lackluster earnings growth don't support higher valuations for most of the market.  

For a big chunk of the Russell 2000, higher yields are a big drag on earnings, as they are less profitable or unprofitable, with weak cash flows, making them more reliant on debt.  The S&P 600 (small caps) has a net debt to EBITDA ratio that's 3 times that of the S&P 500 (large caps). 

There is no free lunch in running the economy hot with big budget deficits.  Higher inflation leads to higher yields which increases the cost of debt capital.  It also leads to higher wages which increases labor costs.  When interest expenses and labor costs go up, that squeezes profit margins, forcing nonprofitable or barely profitable companies to borrow more.  Increasing leverage makes the bottom of the capital stack, equity, riskier, which is reflected in lower stock prices and valuations.  

We've reached a point where the benefits of higher revenues coming from a stronger economy are less than the costs of higher interest and labor expenses.  Its why the stock and bond market correlations have gotten so positive.  This is a symptom of higher inflation coming from fiscal dominance, as expansive fiscal policy initially helps the stock market (2020, 2021), but this leads to tighter monetary policy which ends up hurting the stock market (2022).  When the lagged effect of tighter monetary policy slows down the economy and reduces inflation, the stock market front runs the loosening of monetary policy by going up, even as earnings growth is weak.  This is where we are in the cycle, as stocks front run the rate cut cycle, expecting a soft landing.  But the variable this time are the large budget deficits and the need to keep issuing $2T+ of Treasury debt each year to keep the game going.  The Fed either lets long end rates stay high to keep the economy from overheating and inflation in check, or they go back to QE and low rates to keep the economy from going into recession, risking a resurgence of inflation.  

We are in an interesting spot where the lagged effect of higher rates is hitting small caps and small businesses, while the rich keep getting richer as the SPX goes higher and they collect 5% on their excess cash, most of it coming from the government's huge interest expense.  Its a torturous trickle down effect where the rich with excess cash get paid higher interest from the government and corporations at the expense of small businesses having to pay more interest on their borrowings.  Since the rich are so flush with cash, as stocks keep making new all time highs, and collect lots of interest, that money finds its way into the stock market.  Its a virtuous cycle fed by the government running big deficits.  

So what breaks this virtuous cycle?  A couple of scenarios would do it. 

1. Enough small businesses and small cap companies start cutting back on labor to protect their profit margins, leading to higher unemployment, and less revenues and thus lower earnings.  More corporations have to start feeling the pain from higher interest and labor costs for this to happen.  

2. Inflation makes a comeback, rebounding to higher levels, keeping the Fed from making big rate cuts.  This is what most people seem to fear more than a surge in job losses.  Although my view is that job losses are much more likely than another inflation surge in 2024.  

With the SPX making a big breakout towards new all time highs, investors don't have much concern about either of the above scenarios.  A soft landing is the base case for most.  While there is quite a bit of skepticism about the rally and it going up too far too fast, its based mainly on the belief that the Fed will not cut rates as much as the market expects.  I've written in the past few blog posts about this consensus belief, which I believe will be wrong as the economic data comes in weaker in the coming months.  Since investors are skeptical about the magnitude of the Fed cuts coming, that's a positive catalyst that still remains to fuel this market higher.  You should only consider putting on a longer term short position in US stocks after the consensus starts to buy into the Fed cutting rates more aggressively this year.  There is still that wall of worry out there about rates staying higher for longer.  

We've seen the Russell 2000 lag the SPX badly since the start of the year.  Here's a look at a couple of other times where the Russell 2000 lagged the SPX so much during a strong uptrend.  They both eventually resulted in a sharp correction of 10% within a few months.  

September-October 2014 correction

January-February 2018 correction

Timing these tops is hard, as it takes months of this SPX-RUT divergence to eventually lead to the SPX breaking down.  Things like the Hindenburg Omen which flash warnings of a split market of lots of new 52 week highs and new 52 week lows as the SPX makes new highs have started to fire up.  A couple of them on the Nasdaq composite over the past week.  Along with the high valuations and general complacency out there (low put/call ratios, high CTA equity exposure), a deep correction is waiting in the wings.  The key will be not to get short too early, as momentum in these type of up markets last longer than most people expect.  

SPX is gapping up again, this time to another all time high, as SPX is around 4885 as I write.  Given how effortlessly its gone up since breaking 4800 on Friday, it looks like a break of 5000 is going to happen within the next 30 days.  This bubble reminds me a bit of 2000, when the Nasdaq broke out above 5000, as there was a frenzy for tech stocks.  I distinctly remember semiconductor stocks flying higher in February of 2000, a month before the bubble top.  Right now, semiconductors are the hottest sector in the market.  History doesn't repeat, but it does rhyme. 

Brainwashed by the Fed

If you repeat a lie enough times, eventually people begin to believe it.  That is what the Fed has done with both its higher for longer mantra, and now brainwashing the financial community into believing its dot plot of 3 rate cuts for 2024.  Since when has the Fed been an accurate predictor of future rate moves?  Its counterintuitive, but the STIRs market has been more accurate in predicting future rates than the group that actually makes the interest rate decisions. 

Stocks and bonds are all just one market now.  The correlation can hardly get more positive between the two.  The consensus view is that the STIRs market is pricing in too many rate cuts (150 bps) for 2024.  Its been the recent weakness in the bond market that's infected the stock market, leading to horrible breadth.  Russell 2000 has lagged badly since the start of the year, just as the crowd was warming up to small caps, and expecting them to outperform in 2024.  You are also seeing the VIX make higher highs even though the SPX is hardly going down.  It all looks like a possible perfect storm, but I just don't see it happening.  People are too pessimistic about the rate cut path. 

Investors are worried that the Fed will disappoint the market expectations of 150 bps of cuts this year.  I'm in the minority view that 150 bps is the minimum amount that the Fed will do if there is a no landing scenario (very unlikely given weak global growth in Asia and Europe, lower fiscal impulse in the US).  In a soft or hard landing scenario, the Fed is likely to cut in 50 bps increments, not 25 bps as most expect.  It will only take 3 meetings to get 150 bps of cuts in that case.  That can be done over a period of 3 months.  In past economic slowdowns, the Fed has almost always made chunky rate cuts of at least 50 bps increments.  There is nothing to make me believe that they'll stick with 25 bps moves when unemployment is rising and inflation is falling.  

Fed Funds rate probability for Dec 18 2024 FOMC

Just as rates rising didn't have much of a restrictive effect on the US economy, rates falling won't have much of a stimulative effect.  So I can definitely see a situation where the medicine of a few rate cuts is too weak, forcing the Fed to give the patient even stronger medicine in the form of 50 or 75 bps cuts at a time.  

You see some leading indicators which seem to have bottomed, but much of it is coming from the steepening of the yield curve and reduction in credit spreads, basically financial conditions.  Financial conditions are overrated as an economic leading indicator when there is so much fixed debt outstanding that is unaffected by interest rate/yield moves.  Too many are jumping the gun and trying to front run the turn in the cycle.  There just is not that much pentup demand in manufacturing (inventories not low enough), as we never got the recession cleanse that was needed to restart a strong up cycle.  The excess savings of the bottom 50% is gone (wages not keeping up with inflation), and many have to pay back student loans, which just restarted a few months ago.  

The job market is slowly loosening, with fewer temp work (leads permanent work in the cycle), meaning higher unemployment and fewer wage increases for 2024.  The key is profit margins of small businesses, which are likely getting squeezed as the Rona stimmies are now gone but the higher rates on loans remain.  With lower profit margins at small businesses, they either have to cut workers or reduce working hours.  Both will slowly feed into less wages and lower consumption.  Just looking at how weak the Russell 2000 has been so far this year, as well as for most of 2023 (vs SPX).  That gives you an idea of how smaller companies are doing in this higher rate, higher labor cost environment.  

You likely won't be seeing a recession, just because of the huge government deficits driving nominal GDP growth, but the weakness of small businesses and reticence to make big investments ahead of the maturity wall coming up in 2025 will lead to a noticeable growth slowdown, IMO.  Its being ignored for now because rates came down so hard in November and December, and the stock market went up so much.  Probably the best sector to be invested for the year will be in defensive sectors like consumer staples and utilities, as you are going to get a slower economy leading to chunky rate cuts by the summer, and people are not positioned for that.  The Fed has even stated that even without labor weakness, they will make rate cuts as long as inflation is falling. 

With the recent rise in yields, bonds are getting interesting here for a swing trade, as I don't see yields able to keep rising ahead of a rate cutting cycle which is being underestimated by the majority.  The bond market is sending a strong signal when the yield curve keeps steepening despite the widespread belief among the financial media that too many rate cuts are priced in.  

Because I don't think yields will keep going higher, I am a reluctant short here in SPX.  This trade was mainly a play on the seasonally weak January opex week as well as the somewhat overbought nature of the market last Friday.  I will be looking to close out my short by Friday, as some of the January opex weakness has been brought forward this week.  Also, don't want to hold a short position going into tech earnings season starting next week.  Once we consolidate this month, I am expecting a strong February for stocks and bonds as weaker economic data starts to come in, moving investors more towards my view of a more aggressive rate cutting cycle than is being priced in.