Its a MAD market

Most investors are in M.A.D. mode.  What, me worry?  The market keeps grinding higher, and the shorts keep losing.  Unfortunately for those that are short, the window of weakness for the SPX is getting smaller and smaller.  Seasonal weakness has not played out for most of the last 2 months, despite the elevated net long positioning among asset managers and the complacency of the crowd.  The election has been ignored, and it seems most believe that there will be an end of year rally after the election is over.  On Twitter, the bears are dropping out like flies, as I've seen many throw in the towel as the SPX busted out to new all time highs last week.  

The bullish price action is uncanny as we are heading into the last few weeks ahead of the election.  Maybe its the strong SPX rallies post election in 2016 and 2020 that have investors complacent, one won by Republicans, one won by Democracts. It appears many believe that based on recent history, it will go up post-election no matter who wins.  However, if you asked investors if stocks would go up or down if the corporate tax rate went up from 21% to 28%, most would say they would go down.  And the Trump tax cuts are not something that automatically gets renewed if there is no legislation.  Those tax cuts are set to expire if the next President does nothing and lets them expire at the end of 2025.  And Harris will let them expire.  That plus other low probability risks to stocks such as raising the capital gains tax rate, which is possible in the small chance that Democrats sweep the election. 

On CNBC and Bloomberg, there is very little talk about the ramifications of the election.  The recent news surrounding geopolitics, strikes, hurricanes, and even the Fed have distracted investors from thinking about the big one:  the election.  And its the one that can actually have a meaningful fundamental impact on the future earnings of corporations and investors.  Maybe the market continues to ignore this risk all the way to the finish line on November 5, but I view that as a low probability scenario. 

Despite what looks like a ripe environment for stocks to pullback, the opposite has happened.  Trading is a probability game.  You can play the odds and make your bets based on historical tendencies in similar environments and still lose.  Sometimes history doesn't repeat itself.  Most good trades on the SPX or other major markets will be only slight favorites.  You just don't get a big edge trading such big, liquid instruments.  So you have to be able to withstand drawdowns, cut losses, and move on.  But you also have to be able to know when its too late to get out.  For mean reversion traders, often times the more stretched the rubber band gets, the better opportunity.  The moments when counter trend traders are losing the most are usually when the best opportunities occur.  Of course this is assuming that the trader has a valid winning long term strategy.  

The only way to get to the long run is if you survive the short run.  The only way to survive the short run is have proper money management and not make huge bets.  

The past week's COT data showed little movement among asset managers and commercial traders.  The large asset manager net long position remains.  The OCC data for last week shows both small and large options traders buying more calls and with bigger premiums than for puts.  The data came in as one would expect for an up week.  No real edge there.  Put/call ratios are generally low, but that is to be expected considering last week's price movements.  

There is a tendency for opex weeks to be bullish on Monday and Tuesday if we are at or near an all time high going in.  The is early week bullishness is usually reversed later in the week, as opex gets closer and options expire, leading to fewer ITM calls and fewer OTM puts outstanding.  This can trigger more outsized moves on opex day and for the following week.  This is what often happened during the monster up year of 2021, when you had lots of call option activity, which led to rallies up to the beginning of opex week, where options hedging forces led to selling later in the opex week, and sometimes spilling over to post opex Monday.  That would be my base case for this week's price action as many are bulled up going into this opex.  

With new all time highs and SPX over 5800, we have to temper our expectations for any pullback that comes this month.  Even with election risk coming to the forefront soon, the price action doesn't support a big pullback.  You usually have more bearish price action or more volatile two way trade at the highs prior to big pullbacks.  We are not seeing that now.  So while my original thesis was for a move down to SPX 5450 when initially short, I now think its likely that the most this goes down in October is 5600.  So I don't even foresee a 5% pullback from the highs ahead of the election.  The shorts will have to be satisfied with a graceful exit and/or minimal gains on a pullback, rather than any big profits.  2024 is the bull's year, and trying to make money on the short side has been trying to squeeze water out a rock.  2025 should prove to be a much different trading environment.  So for the bears, don't waste too many bullets trying to take down this super bull, save them for what should be more of a two sided market next years, with patient bears likely to get paid much more often than either 2023 or 2024.  

Still full short position, as I view any gains early this week to be taken back quickly later in the week.  Covering now and trying to reshort later is trying to be too cute when we are this far overextended with so much investor complacency .  The potential upside is more limited than potential downside this month, so its not worth it to micro trade.  Staying short.