Irony of the Parabola

Since the closing price in 2017, it has been a straight shot up over 80 SPX  points in 6 days. Despite the big gain in 2017, we didn't see anything close to an 80 point rally over 6 days.  This looks like the bear's worst nightmare, but it may be the best thing to happen for those looking for that elusive top.  If you are leaning short, like me, then it is a bit painful, but if you have managed risk and not plunged in on the short side, the opportunity is just getting better and better.  

In a perverse way, I hope that the market keeps going higher for the next few days, because that will signal that the top is closer, and will cause that much more volatility when the market goes down.  I have sized small enough where I have room to add to shorts or just take the loss and not be affected emotionally.  It is times like this when I am glad to keep position sizes small when fighting such a strong trend.  I will definitely trade bigger when the market gets more volatile and I see more concrete signs of a top formation.  But right now, it is about weathering the storm and having enough capital to operate with on the other side of the mountain.

Usually these kind of parabolic rises after a long uptrend are capitulative in nature.  Yes, it is a capitulation of both shorts and longs. Shorts throwing in the towel, with losses getting too big, and longs throwing caution out the window and diving in with FOMO on the mind.  

Really the worst thing that could have happened for bears is a continuation of a low volatility grind higher, just prolonging the rally.  But the speed of the rise is a good sign that while the top will happen at a higher level, there should be a lot more volatility once we get there because of all the air underneath.  The air is getting quite thin up here, with SPX at 2757, a level that I would never have imagined would happen back in 2016 or even last year.  Yes, you will get a one time boost to earnings growth in 2018 because of the lower corporate tax rates, but as soon as you get a Democrat in the White House, there will be pressure to get those corporate tax rates back up. 

Today, we finally saw 10 year yields break out above 2.50%, as it has been hanging just below that level as the pressure from the relentless stock rally eroded bond sentiment.  This rise higher in yields will act as a brake on the SPX rally as this stock market cannot handle much higher rates, regardless of what you hear from the pundits.  The only reason the stock market was able to rally so strongly last year was because 10 year yields didn't go up with the stock market.  If the 10 year had actually rallied like the 2 year yield in 2017, you would have had 10 year rates above 3% and that would have been a rally killer.  

For the shorts that can withstand the early storm in 2018, they will be rewarded well later in the year when there is payback for all this greedy excess in stocks.