Chasers are Back

Its as if Liberation Day didn't happen, the trade wars are behind us, and its all blue sky ahead.  The market is moving on from the negative effects of tariffs, towards the positive effects of tax cuts and blowing out the federal budget to pump up the economy.  Trump was initially viewed as a huge boost for the US economy after getting elected, with excitement over tax cuts and deregulation.  Then the tariffs started coming out.  And it was as if Trump didn't care about the stock market and was hellbent on putting on tariffs no matter what.  And that ended up being the wrong thesis, with Trump caving amidst the heat.  Now we are back to pumping on tax cuts.  Life is a circle.  

Many remember how the markets kept going higher as the Trump tax cuts were initially passed in late 2017, eventually resulting in a parabolic blowoff top the following month.  I am sure some are expecting the same thing to happen this time.   But 2025 is not like 2018.   

In 2018, the fiscal deficit was in the low single digits.  The 10 year yield was in the high 2% range, not in the mid 4% range.  You had much less retail investor participation back then.  Now, almost every Joe Schmo is in the stock market.  No, this is more like 2000 than 2018.  Those who claim that this is the most "hated" bull market are laughable.  The retail trader flows data from JP Morgan are showing huge retail buy flows since last summer.   The fund inflows over the past year have been outsized, and much bigger than any year since 2008, with the sole exception of 2021, when the Covid money spew spilled out to all risk assets.  Speculators are heavy into this market.  There is still a lot of hot money in the US stock market.  

Last week, after the relief rally on the China trade talk news, the most speculative Mag7 names NVDA and TSLA rallied hard, along with various smaller cap spec names like RGTI, QUBT, HIMS, etc.  A lot of it was short covering, but there was also new long positions getting put on.  Its almost a reflexive reaction to an up market.  They flock towards the high beta spec favorites TSLA and NVDA.  It reveals the high risk appetite out there.  

Lot of fund flows have been going to leveraged Nasdaq 100 ETFs, mostly on the long side.  As you can see, these levels are back to the bubbly time period in late 2024.  

It late April, as the SPX was struggling to break above 5500, I saw many investors compare this market to 2022.  Now that we've V bottomed all the way back above 5900, there are now comparisons to 2020.  It shows you how quickly market views change in this market, and how bullish the crowd has become in such a short period of time.  

The COT data as of last Tuesday didn't reveal much, as the expected increase in asset manager longs happened, along with small specs.  What was a bit suprising was that dealers reduced their large short positions into the rally.  They are usually fading the big moves.  Big picture, it really doesn't change anything.  We could see a few more weeks of a grind higher in the SPX based on what I am seeing.  

The put call ratios really dropped hard this week, and the ISEE call put index are now back to outsized call buys over puts.  Speculators are back to betting on upside via calls, which is an early warning sign that the uptrend is now vulnerable to sudden down moves, as showchased by today's big gap down.

The bond market is a popular topic these days.  I remember back from 2008 to 2020, lower bond yields were viewed as being negative for stocks as it supposedly signified economic weakness.  Yet stocks kept rising even as bond yields kept dropping.  Now the popular view is that higher bond yields are bad for stocks, because of what happened in 2022 and 2023.  Yet, stocks kept rising even as bond yields kept rising.   With economic weakness and labor market weakening more and more, I have a hard time believing that bond yields will go high enough to really hurt stocks.  People will forget about the tax bill after its passed, and inflation from tariffs is overhyped, as the energy deflation and shelter disinflation will counter a lot of the imported goods inflation.  And the economy is not as strong as many believe, as the withheld tax data from the Treasury is showing weakening income taxes withheld numbers in May.  

I expect the next big down move in stocks to come from recession fears, not inflation/higher bond yield fears.  It doesn't make me a bond bull, but I am definitely not bearish bonds at 10 year yields at 4.5%.  I would rather play economic weakness via short SPX than long Treasuries.  

Moody's came out after the Friday close to downgrade US sovereign debt, which is bad timing for those who have been waiting for the right time to strike on the short side.  I was looking to short this Monday if we were to trade above SPX 5950, near the closing levels on Friday.  Alas, it is not to be.   I will not chase shorts in the hole after such a fierce burst of upward momentum.  I expect the first dip to be bought, although I will not be buying it as I see the possibility of a dip going as low as 5700 before a strong bounce back.  If the market does shrug off this news and goes right back to 5950, which is very possible, I will be looking to short at those levels to play for a pullback down towards 5750-5800.  Right now, the news ruined the post opex short play.  I will be waiting for the next rally to short.