Canary in the Coalmine

Bonds are the canaries in the coalmine.  They are the first movers.  Many short term tops in the SPX are foreshadowed by an intermediate term move higher in yields.  After bottoming at 3.60% on Tuesday, Sep. 17, the day before FOMC meeting, 10 year yields are now 40 bps higher, 3 week later.  The 4.00% yield area should be short term resistance for 10 year yields, as the Fed is still hell bent on making a dovish mistake and boxing themselves into a bunch of rate cuts.  Political Powell, once again, is making another monetary mistake due to his greed, looking to stay in power by trying to prevent Trump from getting back into the White House.  This time, instead of delaying hikes, it is rushing and pushing forward rate cuts that are unnecessary.  

Bonds are calling BS on the Fed's rate cutting path, afraid of another dovish mistake on Powell's part, his 2nd in less than 3 years.  The aggressive steepening of the yield curve, the refusal for bonds to rally despite a bigger than expected 50 bps rate cut at the last FOMC meeting, and the firming economic data.  Powell is trying to put Harris in office to assure that he gets renominated for a 3rd term, with inflation ignored and concerns about a labor market that isn't even that soft, all pretense for big rate cuts to goose the stock market and odds of Harris getting elected.  

The only way to keep the long end under control is to stop QT, and do QE again.  With the monster budget deficits, there is just too much Treasury supply to keep yields under control without a recession.  Even with 50 bps whopper cuts every 6 weeks.  Powell is once again short sighted, looking out for himself and trying to pump up the stock market to curry favor among the rich and powerful, to get support for a renomination in 2025.  It is all but guaranteed that a Trump presidency will look to replace Powell with someone that listens to Trump, not ignores him.  And Trump can clearly see that Powell is being political, and will get his revenge by kicking him out in favor of a new FOMC chair.  That new chair will likely be even more dovish than Powell, looking to keep rates low no matter what. 

The whole premise for the post FOMC rally in stocks was that the Fed was going to be dovish, to support the economy and ignore inflation in order to try to boost the job market, and thus the overall economy.  A soft landing, or even no landing scenario.  But the big cut has become counter productive because long bond yields are going up, not down.  So it minimizes the monetary stimulus of the rate cuts.  And without monetary stimulus working throughout the curve, the stock market will not be able to hang out at these nosebleed valuations for long.  The euphoria can last a few weeks, maybe even a few months with a Trump victory, but ultimately it will fail under the pressure of sticky long bond yields above 4%.  

This bond weakness comes at a time when the stock market is facing the uncertainty of the election a month way, where odds are 50-50.  You cannot get more uncertain that a coin flip.  And this market needs a Trump victory.  There is no way Harris will extend those Trump tax cuts.  She has other ideas of how to bust the budget.  And no, it will not be as stock market friendly as Trump's budget busting plans, as it will funnel more money into the lower and middle class, igniting inflation again.  

Back to the stock market.  Last week, we saw a pullback in the US amidst geopolitical concerns as crude oil rallied a few dollars and VIX squeezing higher.  It was a very mild pullback, contained to SPX 5670, the top in July.  After the blockbuster, and heavily manipulated NFP numbers came down the pike, you got the reflex rally higher in SPX towards 5750, where it is now facing some serious resistance.  During the pullback, the put buying remained subdued, and the bulls were defiant.  The financial experts on CNBC stayed bullish, and have completely bought into the Fed put and soft landing theme.  I could feel the latent bullishness on Twitter as well.  Its a warning sign that there are a lot of bulls out there that still aren't prepared for the coming election volatility.  It increases my conviction that you have to put on shorts early this week, before everyone comes to their senses and realizes that they are paying top prices right ahead of some serious election risk.  

The COT data confirms the lack of concern and heavy bullish positioning.  Asset managers hardly reduced their net long positions in SPX and NDX futures.  They even increased their net long in Russell futures despite the weakness post FOMC meeting.  Dealers have gotten even more short, shortest YTD, as the small reduction in asset manager longs was more than made up for by a reduction in shorts from leveraged funds.  In total, a bearish picture from the latest COT data.  

Covered half of my SPX short before the NFP on Thursday, and looking to re-add the short today or tomorrow.  I don't think this market will give you much time to short the highs so I will be in a rush to short any rallies.  I am looking for a return of volatility starting later this week.  Will not be picky about trying to nail the top this week, because of the lopsided risk/reward at these levels for shorts.