Tight Corporate Spreads

For those looking for an immediate bear market, its quite unlikely.  Corporate bond spreads are getting tighter over the past few months.  Ahead of previous bear markets or near bear markets (Aug 2015, Dec 2018), corporate spreads always were widening before the SPX downtrend started.  

There are 2 exceptions however:  2011 when corporate bond spreads were already historically elevated before going even higher and 2020 when Covid happened.  So based on this alone, it looks quite unlikely that there will be a credit event that triggers a big move lower in SPX.  It doesn't preclude a short term panic lower like late Jan-Feb 2018, when corporate spreads were tightening but SPX went down big anyway because the index was massively overbought and going parabolic.  

Despite tight corporate spreads, I am a believer that SPX upside is limited given current high valuations, the length of the rally (4 months since the last meaningful bottom), and future prospects for growth (poor). 

Usually what happens in a market like this is the market grinds higher, and suddenly, there is a sharp pullback, which causes corporate spreads to widen, with Treasury yields going down.  Then, the market recovers the losses from the pullback as the crowd expects the Fed to turn dovish, and yields stay lower, and corporate bonds don't tighten as the SPX rallies from the pullback.  This is what happened in 2000, 2007, and 2015.  

Last week's blowout earnings from NVDA has helped to keep the parabolic trend intact, and its still a stock that I would avoid shorting given its strength relative to the market.  I am a non-believer in the AI hype, and the current investment spending on AI from venture capital to big tech will likely fizzle out sooner than people expect as the return on that investment will be poor.  The only real immediate impact from AI is its use in graphics, and that market is not big enough to support all this spending.  Once big tech realizes that AI is more like the metaverse than the internet, they will do what META did a few years ago and stop spending.  The biggest beneficiary of that AI spending is NVDA, so you can guess what will happen to NVDA's stock when that spending contracts.  

With regards to the current SPX rally and when it will top out, my best estimate is late March/early April.  These strong rallies usually go on for 4-5 months before a meaningful pullback, and this one will probably lean more towards 5 months because the current price action is not indicative of a topping market.  What you need to see is more optimism about the Fed (with bond yields going lower) to get the excitement and euphoria going.  That's still missing.  I don't see this market going into a sustained downtrend based on a hawkish Fed.  You need to see weaker economic data (lower jobs, lower inflation) to get the bond yields lower and higher anticipation for lower rates.  Only after that happens, along with another few percent move higher in SPX can you think about shorting this monster.  

Reduced my bond position, but will increase it again if I see yields go a bit higher.  Still think the next big correction in the SPX will be accompanied by bond yields going lower, not higher.