Rock and a Hard Place

We are between a rock and a hard place.  There are sweet spots in the charts where you have good risk reward for a swing trade, for example after a flush out move lower in a strong uptrend (April monthly opex day), or the first retrace lower on bad economic data/earnings (after META disappointing earnings and higher than expected PCE inflation in GDP report) after the initial jump higher.  Right now, most of the bull fuel feeding off of the strong oversold levels have been used up. 

Over the past few days, the market has thrown some curveballs.  First, which was a surprise for most, including me, was Powell doubling down on his dovish rhetoric, believing that disinflation will continue and allow him to cut rates later this year.  He was way too early in celebrating the disinflation in late 2023 by forecasting rate cuts for 2024, and he's not backing off.  People are driven by incentives, and his incentive is to stay in power as Fed chairman, and that means keeping Trump out of the White House.  He won't admit as much, but Powell knows he's going to be fired at the first opportunity by Trump if he's elected.  If its Biden, he probably gets renominated as Fed chair.  So Powell is incentivized to help Biden as much as possible leading up to the election in 2024.  That means keeping the economy as strong as possible, ignoring high inflation as much as possible without losing his credibility.  

I thought Powell was going to cave in to public pressure to be more hawkish and sound tougher on inflation, but his hunger to remain in power has overwhelmed any kind of public backlash on inflation.  The dovish Fed was initially met with a strong rally, but sold off the same day, but then recovered quicker than I expected with the weaker than expected nonfarm payrolls which helped to put a big bid in to bonds, which reflexively kicked off a strong rally in equities.  This violent chop was definitely not expected, but it also shows how nervous the market was.  Despite the nerves, the lasting selling pressure just wasn't there, as most of the eager sellers had already sold.

On the macro front, it appears that traders are backing off the no landing scenario after the latest pullback in stocks and the weaker than expected nonfarm payrolls, PMIs, and ISM report.  But with bonds going up, they are now back to the soft landing scenario and believing that the Fed will have this market's back if there even a slight sign of labor market weakness or disinflation.   So back to optimism again on macro matters.

That is being reflected with SPX almost back to 5200, levels where upside is limited.  But downside also looks limited, with the market showing more strength than I expected.  The last COT futures report showed asset managers and small speculators reducing longs as of April 30, before that dovish Fed meeting.  Asset manager net long position in SPX futures is now back to levels of July-September 2023, when the SPX was trading around 4500.  Dealers also covered some shorts, but they still have a large net short position.  Historically, whenever dealers had such large short positions, a big correction was due within 6 months. 

 

A lot of the speculative froth has been wrung out of this market in April, which makes it dangerous to short in the near term.  But I just don't think the market is bullish enough or the fundamentals good enough to chase longs after such a big bounce off the April 19 low at 4967.  

This leaves traders between a rock and a hard place, with no easy trades.  Don't want to force anything here, there are no good risk reward opportunities in the SPX or in bonds.  For individual stocks, the opportunities are a little bit better but also mediocre.  Haven't been reading the market well for the past few months so the market will have to induce to me to put on positions by getting to prices where I want to buy or sell.  Right here, I don't want to do anything.