Pullback Looks Imminent

Yeah, these days everyone is talking about GME and other short squeezes (AMC, BYND, etc) on heavily short stocks.  So I don't have much to add on the topic, short term, I am not playing those names, and long term, well, let's put it this way:  I see at least 300 individual stocks that I have about 80% downside in a year, on average.  So GME just joined the club, with another 299 members.  This is no exaggeration, it is just the ridiculous bubble that we are in, and its at a very late stage, so 1 year is definitely enough time to catch an 80% down move, even if there is a few more months of this bubble left.   At this point, I am looking at the short borrow rate, the average cost to maintain a short for one year in many of these names, to see which ones to short and hold for the ride down lower.  

Barring any fireworks in the final 3 days of the month, January will be the 3rd straight month without more than a 2.5% correction (daily basis) since end of October.  That wouldn't be a big deal if the VIX was ranging from 12 to 16, but its been between 20 to 30.  So you have had a high VIX for 3 straight months, even though you haven't had a  move of more than 2.5% down on a closing basis.  That is the kind of market that makes put options buyers feel like suckers.  And when investors start feeling like put protection is a waste of money, a correction is usually coming soon.

The intense intraday volatility lately even as the SPX stays near all time highs is a warning signal that for the short term, the SPX has reached the saturation point, where most investors are nearly fully invested, and aren't looking to aggressively add more equity exposure.  Hedge fund positioning data from prime brokers all point to hedgies being the most net long since 2007.   

For me, positioning data is much more important than sentiment data which changes  frequently, often based on whether the market went up or down that day. Commitment of traders data is confirming that asset manager long exposure is near the top of the range for the last 20 years, although they are still not as net long as a % of open interest as in February 2020.  And considering how strong the market has been over the last 3 months, that's not a sign of an imminent top. 

We haven't seen the broader market go parabolic like the Russell 2000 and the bubble stocks, so the SPX isn't really that overbought.  With the gap down today, SPX is up only about 1.5% on the month, which is nothing compared to what you see in other bubbles in their final stages.  So that gives me more conviction that the stock market still has considerable upside left, so after a February pullback, there is perhaps another 10%-15% higher, before you can short on a longer time frame to catch a monster move down.  

I still haven't pulled the trigger to get short, just playing it very cautiously on the short side, but another rally to an all time high next week would be enough to tempt me to put on a short.  I wouldn't be looking for a big move lower, maybe 100 SPX points of downside.   

I am also looking at possibly shorting bonds during the next stock market dip, I am more optimistic on the economy than most of Wall St.  There are lots of negative catalysts for bonds in the coming months: fiscal stimulus negotiations, increased supply from the stimulus bills, reopening of the economy after widespread vaccination, increasing commodity prices.  

FOMC meeting today, expect Powell to say the SOS and kick the can down the road.  The Fed are experts at looking at the rear view mirror, so don't expect them to do anything forward looking like bubble mitigation for financial stability or anything else useful.