Listless

The word that I hear a lot these days is resilient.  On CNBC, they are in awe of how resilient the stock market is.  They act like its a miracle that stocks are going up as yields continue to go higher.  Many are forgetting that yields have been going up since March along with the SPX.   Stocks can go up for a long time while bond yields are going higher.  Watching the bond market doesn't really help much when predicting the stock market.  

Then you have the breadth boys.  The same old technicians on Twitter complaining about bad breadth.  Those guys still think that strong breadth is the cure all for the world's ills.  Never mind that a broadening market with good breadth in January and February preceded the worst month of the year.  Same thing happened in July 2024 as the market broadened out, right before you had the worst 2 weeks of the year.  In the stock market, they never let facts get in the way of a good story.  

Rather than resilience, the more apt word to describe the market is listless.  It should feel more exciting than this.  If AI is as transformational as all the pumpers out there are saying, why does this market seem so boring?  Even a lot of the AI names feel waterlogged.  NDX is still in a long term uptrend, but now its going up in drips and drabs, you aren't seeing the parabolic frolic that you saw for most of 2024, second half of 2025, and in Q2 of 2026.  You get a couple of up days, everything looks great, and then you get an out of the blue gap down that takes back all the previous day's gains, just like you saw on Wednesday.  

The market feels saturated.  The chasers don't have to chase anymore to get their allocation of the hottest names.  They can wait a few days and they get their pullback, and can buy cheaper.  Why would anyone in this market want to chase strength when they can wait a few days and buy on weakness at lower prices?    When uptrends flatten out and you get sideways chop, chasers get punished, and regret buying into strength.  Those who are more patient are getting filled quicker, and don't feel the need to chase anymore, because pullbacks, while being shallow, are more frequent.  It reinforces the lack of momentum in this market.

A lot of money has poured into US stocks over the past 3 years.  In particular, the last 12 months.  Expecting these kind of equity inflows to continue is wildly optimistic.  We've had historic levels of money pouring in.  It seems like everyone has a big allocation to US stocks, yet many say that its the most hated bull market ever.  Its like Yogi Berra said: no one goes there anymore, its too crowded.  

We are in that awkward period where stocks are still in an uptrend, but the trend is weakening, and the majority are heavily allocated to the best performing names, which are outperforming, so no one is really worried.  They talk about bond yields and how they could hurt stocks, but I still hear a lot of those CNBC experts who think that the Fed could just hike one more time and be finished with this rate hiking "cycle".  There is still plenty of denial out there.  Many are still skeptical that the Fed will continue hiking rates beyond December into 2027.  The STIRs market is pricing in 4 more hikes for the next 12 months.  I'll pick the market prediction over a CNBC talking head any day.  

All this talk about the bond market is a distraction from the real mover, AI.  All it took was an FT rumor about OpenAI revenue estimates being $20B less than forecast to trigger a quick intraday downdraft.  After the dust has settled, all the NDX outperformance over SPX since September 21 has been erased in a span of 2 days.  That is meaningful.  The NDX strength made me hesitant to short this market.  Now that NDX is no longer outperforming, it makes me want to short the next bounce that comes.  

BofA client stock, bond, and cash allocations, as of October 1.

BofA client flows for the week ending Oct. 02.  Institutions were heavy sellers, while hedge funds were buyers.  

Schwab Trader Activity Index for September.  Remain near highs over the past 3 years.  

SpaceX saw net flows 50% higher than the second-ranked stock, with buying peaking in the final week of the month. The size and timing of the flows suggest enthusiasm remained strong rather than fading as the month progressed.

Post opex Octobers (starting October 16) have been historically weak.  

They continue to buy the dip in the long end.  

Mag 7 net exposure at 5 year highs, MAGS ETF monthly inflows at all time highs.

Heavy inflows into government bonds last 2 weeks.  

Lot of speculative call buying in TLT.  

Rising global bond yields are a symptom of a lack of liquidity at current prices for stocks and bonds.  When there is plenty of liquidity in the system, you get both stocks and bonds rising.  When there is a liquidity constraint, it is difficult for both stocks and bonds to go up together.  In the short to intermediate term, stock-bond correlation is mixed.  In the long term, bond market weakness is often a leading indicator for stock market weakness.  

The big event for the coming week is the CPI on October 14, and opex on October 16.  I expect a grind higher into the CPI number, and then a pullback afterwards as we get to the 2nd half of month.  Still on the sidelines waiting for a bit more of a rally to put on shorts, in both stocks and bonds.  This time, the time frame for the short trade will be less than 2 weeks.  It still feels too early to put on long term shorts, as we likely get a post election relief rally in November, even with a Democrat sweep of Congress.