Working off Excesses

There was a lot of excessive speculation in stocks in late 2017/early 2018.  It is taking the market a long time to reduce this speculation by trading sideways to down and wearing out the dip buyers (me included), making them sick of this fading, range bound market which has no lift.  In hindsight, I should have been more cautious entering longs in March, thinking the worst was over.  But with valuations too high considering the weakening fundamentals, I gave the crowd too little credit for coming to their senses and assumed they would blindly buy overvalued stocks after a few week break.

Clearly, it is taking a lot longer for this market to accelerate higher off the bottom, a change of character from the past 9 years when most bottoms were fleeting and resulted in quick V recoveries.  We are no longer in that type of market, and the past 3 months of price action is screaming that fact to traders.  It hasn't helped the bulls' case with the bond market staying weak (although it looks like it bottomed last week at 3.03% 10 yr) and with the dollar suddenly acting stronger. 

This is definitely not a strong enough market that can just shrug off negative factors like it did for the past 9 years with ease.  While it has been painful to see stocks so differently than recent history, it is a great tell showing how close we are to the top of this bull market.  It would be very surprising if the market doesn't make a top for this 9 year bull cycle this year (probably already happened).  But with corporate stock buybacks coming out in full force this month, I am still leaning bullish despite this recent weakness on good news (strong tech earnings, dovish Fed).  There is room for this to go down to 2580-2600 if panic arrives, but I see upside to 2720 later this month, especially if bonds can continue to rally, and 10 year yields start trading around 2.80% instead of 3.00%.  The difference seems minor, but a move back down to 2.80% is a signal of yields stabilizing rather than it being an important level.  Since I am bullish on bonds here, at SPX 2620, the odds favor stock longs over shorts.