Irrational Rally

This rally is even more confounding than the one you saw in July/August 2022 because at least back then, the bond market was rallying with the stock market.  This time, stocks are going up despite the bond market weakness and the additional Fed hikes priced into the yield curve.  Yes, its the soft landing hopes that are driving this rally. 

The market went from hard landing to soft landing in a hurry.  That strong nonfarm payrolls number really got investors believing in either a soft landing or a no landing!  Incredible how all the other economic indicators are immediately forgotten and investors latch on to the blowout jobs number.  That's classic Wall St. behavior.  What have you done for me lately thinking.  

One thing I've learned about shorting the SPX/NDX since the QE era began in 2008:  The rallies can go on much longer than you think possible.  Especially when investors are not totally bought in on the long side.  Sure, we've gone a long way since last October in adding bulls, in getting CTAs/vol control/systematic funds to add equity exposure.  But hedge funds still are below their average net equity exposure.  Here is a recent look at hedge fund positioning from Deutsche Bank:  

On CNBC/Bloomberg, I am still hearing some reluctance from institutional investors to embrace this rally, even as they say that the economy is unlikely to go into recession, as previously feared.  This is just another survey, which I put less weight in than positioning, but I was surprised to see these numbers after the equities rally so far this year:

It does make me want to wait for a more ideal spot to put on shorts, as the SPX could definitely grind higher until you see more overt signs of an economic slowdown, which probably will take a few more months.  During that time, who knows how far the chase for performance and trying to keep up with the indexes will do.  Its totally irrational, as extending the high rate regime by having non recessionary data for the next few months will just make the landing that much harder.  But so much of Wall St. is caught up in playing the short term game and not able to deal with underperformance or worse, big drawdowns.  So they have to often chase even though they know the fundamentals don't support the rally.  

Since they've reduced their shorts via massive short covering in the past few weeks, I don't expect much more juice left in the popular short names in the speculative tech.  That's where I've put on short positions.  I've stayed away from shorting the index until I see more of a blowoff top or signs that hedge funds are back to at least neutral positioning.  I like the risk/reward long term from shorting the SPX here, but with some single stock shorts, don't want to go all in by shorting indexes as well, until I see more signs of a top.  

Stocks shrugged off the higher than expected CPI number, while Treasuries went lower.  The price action does speak to the effect of puts losing value and being delta hedged by dealers, which is to buy back shorts.  Also this is opex week, so you get a lot of influence from options.  It feels a bit too neutral for my liking, so will wait and see.