Mr. Caveman

The Art of the Cave.  Back to the status quo, with China doing nothing to get the deal done.  Deep down, Trump just doesn't want to take the pain necessary to decouple from China.  Those who thought Trump wanted tariffs badly despite economic pain were wrong.  China called Trump's bluff, and will end up winning the pot.  Now that Xi sees Trump as being weak and stock market focused, he will keep pushing his limits, probably invading Taiwan during Trump's term, when he'll meet the least resistance from the US.  

Fundamentally, the market is now back to pre-Liberation Day conditions, which are not good, but also not disastrous.  With these mini-me tariffs, there will be a slight negative fiscal impulse, which will likely be offset by coming tax cuts.  

There remains the elephant in the room.  The ever growing US budget deficit.  Even with big capital gains from 2024 increasing taxes paid, you still had the budget deficit increase year over year.  Keeping Fed funds rate at 4.33% is a budget buster for the US government.  Ironically, a Fed cutting cycle could prove to be useless as the reduced interest income to the private sector from lowering short end rates would offset any kind of stimulus to the part of the housing market that finances off of SOFR.  These giant budget deficits are keeping long end yields elevated, near 5%, even as the economy is weakening.  The Fed's worst nightmare would be to cut short rates and see long end yields not budge, or even go up.  That would kill any kind of housing stimulus from Fed cuts as mortgages are priced off of the 30 year, and just end up reducing Treasury interest income to the private sector via lower Fed funds rates.  

With the giant budget deficit, the upcoming tax cuts and Trump's caving on Liberation Day tariffs, we are setting up a scenario where the economy goes into stagflation:  maintaining low growth, with higher inflation.  The inflation will come from higher prices on imported goods, and less immigration, leading to higher manual labor costs.  Going from Biden to Trump has drastically cut down on illegal border crossings, reducing the flow of immigrant labor.  

Less population growth = lower economic growth.  The Covid stimulus has basically run out, and states and local governments will now have to balance budgets again without the Covid largesse to fall back on.  That means less state and local stimulus than during the Biden years.  

On a technical basis, the SPX has kept its bullish pattern of higher highs and higher lows.  You still have a big wall of worry over tariffs, which is obvious when you go on Twitter and see all the bears out there.  With Trump caving on tariffs, the bears are running out of excuses to sell this market.  Especially if we blast past 5800.  Systematic funds and CTAs still have low equity exposure, and the biggest trend following ETF, DBMF, is actually short SPX futures, which is uncommon.  I expect that to change to a long position within the coming weeks.  So you have low positioning among systematic funds which will keep buying as the VIX goes lower and the SPX goes higher.  That will provide a bid under this market for the next few weeks.  

The COT data as of last Tuesday didn't show much of a change in positioning.  Asset managers are slow to add back to equity longs after purging a lot of their long positions in the 1st quarter.  They are still at historically high net long levels, but not high enough that would provide a short term edge.  What I find more interesting than the SPX data is the VIX COT positioning.  Commercials are now net short VIX futures, which is rare.  They are usually on the right side of the long term moves in VIX.   Commercials are at historically low levels, which means the long term move in VIX is likely lower, not higher.  This gives me some pause when I am thinking about putting on bearish SPX positions.  

We finally have seen more bullish flows in options, especially single stocks, as the equity put call ratios have been lower the last few trading days.  There is still a lot of put buying in the index options, but its being balanced out by a lot of call buying and speculation in high beta names like TSLA.  

Overall, it doesn't look like a good spot to be short.  I am long term bearish, based on the historically high equity exposure of households, high valuations, and the large inflows into US equity funds over the past 12 months.  In the short to intermediate term, we could see fast money and systematics chase this market higher and squeeze the bears.  I am waiting on the sidelines looking for higher prices to enter short positions.  

With the good news coming out of the US - China trade talks, we are getting closer to the end of this rally.  But I don't expect an immediate reversal and resumption of the downtrend.  With Trump likely to pump tax cuts in the coming months, we'll likely chop around in a range around these levels for a few weeks before we get the next downside surprise.  I would not be married to any bullish or bearish views at the moment.  I will be looking to fade any extended moves in the coming weeks, both up and down.