Eye on the Ball

The day to day fluctuations in a volatile market can obfuscate the bigger picture.  Its a terrible backdrop for equities.  But you can get big counter trend rallies which dazzle the crowd, and confuse and frustrate the bears.  As a bear, in a bear market, you have to keep your eye on the ball and brush off these rallies as part of doing business.  If markets always went down in a bear market, they would be done in a couple of months, and history shows that they average around a year, and longer when the previous bull market has been extended (13 years in this case).

Bear market rallies are famous for being face rippers, and we had another big one, the 3rd 2+% ripper since the June bottom, with the SPX going up 106 points.   That is the crack cocaine of bear markets.  The big one day rally.  It lures in the bottom pickers, who withstand the pain of bleeding out when they get the satisfaction of being long during one of these face rippers.  It feels exhilarating when they happen, like hitting 3 cherries in a line at the slots in Vegas.  It keeps them hopeful, that THIS is the turn, the big bounce that will take markets back to where it was 2 months ago, 3 months ago, etc.  

I've noticed a steady increase in speculation among the fast money crowd, as they are getting more aggressive chasing the highest beta names.  BTC going back above 23K has also gotten those speculators more excited.   This is all part of the package in a bear market, it looks like the world is going to end and then a few weeks later, people start getting FOMO when the market has a 3 day rally.  You get some echo rallies in a post bubble environment, where traders go back to the well, something that worked great 2 years ago, looking for an encore.  Take a look at GME, its flat on the year as the SPX has gotten pummeled.

The fundamentals have not changed.  They are just as bad as they were when the SPX was trading at 3750 last week.  There were fears that Russia would completely cut off gas to Europe, but news that they will be restarting gas flows through Nord Stream 1 set off a big rally in Eurostoxx yesterday.  And the chain effect of a higher euro, helping stocks in the US because the big fear these days is the strong dollar, which just obfuscates the real problem, an economy that is in a slow motion crash.  Yesterday is the type of "good" news bear market rally which usually don't last.  You saw a few of them in the fall of 2018, before the final capitulation in December.  You saw a bunch of them in 2008, and 2001. 

Watching CNBC and Bloomberg, it seems like the most common reason they cite to be bullish is because everyone is bearish.  Hardly heard a word on CNBC or Bloomberg about everyone being bullish in 2021 as a reason to be bearish.  

It just goes to show you how little there is in favor for the bulls.  Liquidity, leading economic indicators, valuations all favor the bear side.   Liquidity is the most important variable in the stock market.  US M2 money supply is going down!  That's unheard of.  The spigots are shut tight.  The stock market is on its own, into a rapidly slowing economy.  After a giant bubble.  The conditions are much worse than 2001-2002 (Fed was cutting aggressively), the last post bubble period.  And the SPX went down 50% in that bear market.  Its very possible that can happen again.  SPX 2400 is not a ridiculous price target, it takes the SPX back to where it was in 2017.  By comparison, the Eurostoxx 50 is now trading at levels that were seen in 1999, when the SPX was 1200.  Equity markets can go sideways for a long time, longer than people expect. 

It hasn't paid to be patient when entering short positions, and I expect that trend to continue.  When you get a big rally like yesterday up towards SPX resistance zone at 3900-3950, it is a chance to put on shorts.   I have initiated a short Nasdaq position and will add today and look to have a full position on before the end of July.  Also sold most of my energy longs, and positioning for a resumption of the downtrend in August and September.