First Warning Shot

Yesterday was the first warning shot from the bears since the post CPI relief rally on May 15.  This takes on more significance with the rally off the geopolitics/higher rates fear bottom on April 19 is now 5 weeks old.  That April bottom wasn't really capitulative, so it didn't provide enough of  reset to fuel this market higher for 5 months like the August-October selloff, which was exhausting and purged a lot of positioning.  So run of the mill dips like April's fuel up moves for a few weeks, and then enter a window of vulnerability where sudden dips and corrections occur.  

Until yesterday, there wasn't much to say, as the market was flat as a pancake and VIX was in the 11s.  The VIX is still quite low here in the 12s, but part of that is the lack of important econ. data in the next week and the long weekend coming up.  When the market is flatlining and doing nothing, like it did from May 16-22, there is no edge.  There is no signal to trade off of.  When you get the next movement off of this quiet period, which was to the downside, is where you get the signal.  

Thursday's selloff coincided with the post NVDA earnings blowout euphoria which took ES up towards 5368, or almost SPX 5350, and the bond selloff triggered by higher than expected S&P Flash PMI numbers.  That tells you something about the weakness in bonds when third tier econ. data can take bonds down so easily.  Notably, you saw NVDA strength unable to lift tech stocks, even semiconductor names.  A sign of buyer exhaustion.  That being said, usually the first small dip is bought and the highs are retested.  I expect this dip to be bought and another run towards the SPX 5350 area where I expect sellers to come out once again.  

COT Futures positioning data showed that asset managers have aggressively re-added to their net long SPX position, almost back to the highs set earlier in the year.  Dealers remain heavily short, a long term bearish signal.  This data is as of Tuesday, 5/14, so doesn't include the CPI rally where I am sure asset managers added to their longs.  That puts us back to saturated positioning among asset managers, which means most of the fuel for this rally has been used up. 

The complacency is evident in how cheap options have gotten, with the VIX back to levels last seen in 2019.  Volatility is just too low for how high this market is, but it just shows you the short term nature of this market.  As well as the popularity of selling options for income, which have sprouted more option selling income ETFs.  This is the kind of thing you see when there is little fear of a big selloff, and when investors feel confident and comfortable.  Not a great sign for long term returns when you see this kind of investor behavior at historically nosebleed equity valuations.  

On the sidelines waiting to put on shorts into the next rally, as I see good risk/reward for index shorts as well as individual names for the next few weeks.  The bond market is weak, so it is a no touch at this moment.  Shorting SPX is a superior trade to being long Treasuries for a risk off scenario.  That is quite the sea change from the 2009 to 2020 era where long Treasuries was almost always the superior trade to being short SPX.  But this is a totally different regime to back then, so adjustments need to be made.