Crocodile in Wait

Staying underwater, waiting days and weeks for the kicking legs, conserving physical and mental energy.  This is the life of the cold blooded predator.  Let the eager shorts go after the hard prey, the fast and healthy.  We wait for the easy prey, slow and hurt.  This bull is old as sh*t, but still healthy as a horse. But there are some signs of weakness creeping in.  Like the point guard whose lost a step and can't get by his defender like he used to.  Like the quarterback whose lost a little zip on the long ball and can't hit his receiver on time on deep throws.

Up until Powell opened his mouth last week, the up trend off the December 24 bottom has been too steady and strong for there to be a good risk/reward short.  

But over the past several days, we got a few good signs that this up trend is getting closer to the end.  

1.  We broke out to a new all time high, but came right back down under 2900, in volatile back and forth action over the last week.  A fake break out.  

2.  The Fed told the market that it isn't ready to do a preemptive rate cut, which is what the bond market and the equity market were both starting to expect.  That increases the likelihood that the Fed will keep rates too high for too long until the US economy reaches the point of no return and heads downhill.  

3.  Bonds have stopped going up along with stocks.  This is the big one.  Since 2000, you have had drops of greater than 20% in the SPX only when bonds were going down while stocks were going up.  In spring of 2000, summer of 2007, and spring of 2011, you had bond market weakness while stocks were going higher before waterfall declines a few months later.  

One of the main reasons stocks continued to go higher so relentlessly this year is because bonds were also rallying at the same time.  That is straight out of the early 2016 playbook.  When risk parity is working so well, there is no incentive to sell stocks when bonds are acting as a perfect hedge that provides both interest and capital gains even while stocks are going up.  

Unlike what most paper napkin/5 minute macro experts think, a weak bond market is not a sign of a healthy stock market, it is a sign that monetary policy will be getting tighter to fight the up trend.  Conversely, a strong bond market is not a sign of an unhealthy stock market fighting economic fundamentals, because it means that monetary policy is getting looser even as the stock market goes up.  

It has only been a few days, but I am finally seeing the relentless bond rally since November 2018 slow down, just as the SPX is at nosebleed levels, with complacency rising, and as the uptrend is starting to flat line.  If the SPX stays under 3000 for the next 2 months, that will probably mean that the equity market is saturated with bulls and the weakening economic fundamentals will come to bear on the market.  

With so many hedge funds underexposed to equities during this relentless rally, they will be adding exposure and providing buying support on pullbacks for the next several weeks.  But once that phase is over, and hedge funds are back to normal to high exposure levels, the SPX will be vulnerable to a waterfall decline like December 2018.  That is the time to start the short campaign.