Reflection

This is mostly going to be a personal post, but first some market comments. Since my last post, there was only a slight pullback before major news was announced which was that Bessent was able to negotiate a "trade deal" with China. It's really just a temporary de-escalation for 90 days such that Chinese tariffs will be reduced to 30%. This was enough relief to result in the market to pop 3% the following day and we've added to those gains a bit more. On Friday night, Moodys downgraded US debt a notch to Aa1. They are the 3rd agency to do so since 2011. I won't get into this for now except for saying this, which I have said before...These rating agencies all had AAA ratings on subprime MBS just prior to the the GFC and since they were made to look like fools, they became tough guys to try and salvage their reputation.  So far, the market reaction has been ho-hum. In General, the market is even more so in an ST overbought condition, but the sentiment reset I pointed out a few weeks back is still firmly in place. That along with how the market has been relentlessly rising strongly suggests this is a bull market rally, not a bear market rally. however, I do suspect that 3% "Bessent gap" will get filled at some point this year. I wouldn't be chasing the market here.

I recently turned 48 and I've been reflecting on my life and certain things that have been happening recently. I must say that I am blessed. Lucky and blessed....perhaps they mean the same thing. I know I mentioned the following before. There have been multiple times in my life where I was severely off track both from a personal and financial perspective. There were several years in which I felt I was in a huge hole...holes that I put myself into for the most part for one reason or another such as being timid and shy, being too laid back without having any goals or a sense of urgency and lastly overconfidence which led to recklessness. Thanks to some luck and lots of resiliency I managed to get back on track for life.  Through the dark times I never had a "woe is me" attitude, I never embraced negative narratives,  I kept it together, I fought. What else can you do but fight is the attitude I always had when faced with a defeat or setback. I would never mope and feel sorry for myself. I never resorted to alcohol or drugs to cope, nor did I ever consider doing so. Instead,  I would do intense cardio. That was my drug. 

At 48 I have a family, a house that's paid off, a great job with significant prospects for growth and I'm in great health. My greatest achievement is my daughter who is beautiful on the inside and out. She is so precious to me which makes me feel so vulnerable. I would kill or be killed for her.  Now and then I can't help but feel a wave of anxiety. What if something happens that takes away any part of this good situation I find myself in? Part of this is imposter syndrome as a result of all the setbacks I experienced and part of this is due to recent bad things that have happened to clients, friends and family. In the past 2 years, numerous people I know have either unexpectedly died or fell seriously ill. I'm a logical person, a positive person, but I can't help but get a bit rattled by this, thinking what if I or someone in my immediate family are next? I have this one client, a sweet Italian lady who recently lost her adult child to cancer. He was my age. This is now the 3rd child this lady has lost in last 10 years. Yes, 3rd child. What do you say to someone in this situation? It's beyond horrible, beyond devastating. You want to talk about having bad luck? Woe is me? Fuck your bad luck. This is what bad luck really looks like. Me on the other hand, I feel almost guilty for the amount of good luck I've had over the years. 13 years ago my mom almost died of a brain aneurysm. She was only 56. There is a 50% chance of survival and if you survive, only a 34% chance that you won't have some sort of permanent brain damage. Therefore,  you have only a 17% chance of surviving a brain aneurysm without brain damage. My mom beat the odds. Aside from her not be able to recall a few minor memories in her past, she is totally in tact. How lucky was she? How lucky was I and my family? That experience really put things into perspective and made me realize the importance of not worrying about the small stuff, of appreciating the things that are really important to you, knowing that it can be taken away in an instant without warning. Recent events have reinforced this. I don't think I'm as resilient as I once was because things have been going so well and it's made me kind of soft. Also, I feel like I have more to lose now.  In 2022 when markets were rough, I had some sleepless nights. Even though my clients held up relatively well and weren't in a panic, I couldn't help feeling vulnerable. I couldn't help feeling that the career I had been building for the prior 5 years was going to fall apart and crumble through my fingers putting me back to square 1 like so many other times and unlike in the past when I've had major career setbacks, I don't have the time to recover anymore. Being young was something I knew I had in my back pocket when things weren't going well. "I got time to turn it around" was something I would say to myself. I don't have nearly as much time now if I fuck things up or if things go majorly south for some reason. Don't fuck it up. I something I tell myself repeatedly.  Obviously, I can't control the markets and must accept that bad shit, i.e. big drawdowns, are going to happen. I just have to ensure the smoothest ride for my clients given the risk they are willing to take, making tactical moves when warranted and be proactive by calling clients during bad markets to hold their hand through it. I did do this in 2020, 2022 and just recently. Lucky for me (yet again) my clients are easy to manage as for the most part they are financially secure, always take my advice and don't have a propensity to want to panic during bad markets.  I'm the one who is supposed to have the cool head during bad markets but it's hard not to get rattled to at least some small degree. Having my emotions "hostage" to the markets to some degree is the worst part of my job. This is a big reason why I do this blog as it serves as an emotional release as well as a way to express the logical part of my brain. Overall, I love my job which I know must be quite enviable. I'm making good money with lots of growth prospects, I get to work wherever I want, whenever I want and with whomever I want. In January I fired a client for the fist time as he is a moody prick who always finds something to complain about.  He was a large client too. I didn't give a fuck, because one thing I don't tolerate is having a relationship with a toxic or negative person.  I think this guy actually has bipolar disorder....not my problem anymore.  

Now I'm going to discuss some things that I'm wrestling with. Although I'm 48 I certainty do not look or feel it. Most people who meet for the first time think I'm in my early 30s and that's how I think and feel too. I keep myself in good shape. I can still keep up with guys far younger than me when I play soccer. I have cheated father time to some degree but the problem I'm going to have to face is that at some point father time will catch up to me.  Will I be able to make the transition from a young man to old man? It's really hard for me to accept that. There is this guy by the name of Bryan Johnson, also 48 this year,  who made millions as a tech entrepreneur. In recent years he has dedicated his life to taking extreme measures to ensure he lives as long as possible because he feels that within his lifetime, it's likely we will have the ability to become immortal as we find a breakthrough to slow down or stop the aging of cells and/or merge with machines. And so according to Bryan, it's absolutely critical to do whatever you can to don't die so that you make it this point of "longevity escape velocity" as he calls it.  Even before I knew of Bryan Johnson I often pondered the possibility that given the rapid pace of technological advancements, we may find a way to live forever. Can you imagine if that were to happen? I'm not holding my breath for that but I don't think this is a pipedream.  

For anyone reading this. if things haven't gone your way, my message to you is to continue to fight no matter what.  This doesn't apply to achieving things that are ridiculously unrealistic but for everything else, you have to keep fighting until the bitter end, no matter how many times you've failed. No matter what. Don't be negative even when things appear grim. Being negative does you no fucking good. Not one fucking thing. It will only harm you, holding you back while making you a miserable fuck. I've mentioned about how luck was a big part of my success, but I will say this....I would not have been in a position to get some of the luck I experienced if I was a negative, miserable fuck when I was down and out. If you're in a shitty spot, do whatever you can that's in your control to make your situation better, even with the smallest little things.  Fight right until the bitter end and if it still didn't work out at least you know you give it your all and not have to look back thinking I could have done this,  I should have done that. That would be an agonizing existence. I already feel some of that agony when I look back at things I should of done or said. It still hurts. But I try not to dwell on the past for too long. You can't go back you can only go forward. Just don't realize this when it's far too late. 

Strong rebound....so far so good but ST overbought now

My previous post pretty much pinpointed the exact point when the market staged a massive rebound. Basically, Trump is showing his willingness to water down his tariff threats. For example, he provided  carve outs for semi-conductors and electronics and he exempted auto tariffs for Canada and Mexico so long as they comply with the USMCA. He was privately approached by the CEOs of Walmart and Target who warned him of empty shelves and rising prices in the months ahead if he follows through with this threats. No doubt other big CEOs have gotten into this ear. Therefore, there's probably some hope or expectation that any tariffs imposed will be more gently administered to allow for companies to adjust. 

The market has now recovered all the losses post liberation day which is quite impressive. In my previous post I said to look at market action to determine whether a rally appears to be bear market rally or the start of a new bull phase. So far, it appears to the latter due to the relentless nature of it. Meanwhile positioning/sentiment is overall still firmly skeptical. AAII sentiment in particular has exhibited a persistent amount of high bearishness that is only comparable to the depths of bear market lows. Many correctly point out to see what these folks are actually doing with the money vs what they are feeling. They have indeed been pulling back their equity exposure, which is currently at 64%. This is not the same degree as the GFC but it comparable to the 2022 bear market.  Near the market peak, at end of December, equity exposure was 70%, likewise,  it was 70.5% end of December 2021 which was also the market peak. By end of October 2022 exposure declined to 61%. The currently allocation of 64% is obviously close to 61% but not there yet, but it could get there even if the market continues to rise or just holds as these folks may be inclined to sell into strength. Given the persistent high level of bearish sentiment, it would appear that selling into strength would be a strong possibility.

I have a friend who approves online trades for TD customers. He told me that during the liberation day meltdown he said the rush into money market funds was the most he had ever seen. Barrons conducted a survey of  money managers at end of March/early April which showed bearishness at at 30 year high... this was prior to the liberation day meltdown!  

BofA bull market indicator has had a notable reset

This indicator has been whacky as of late, not being in sync with other indicators. Keep in mind this is a global sentiment, not the US although these markets are usually highly correlated. Note the very low positioning of hedge funds. Hedge funds in particular, have been big sellers during this latest rout. 

The latest surge in the market has rendered it ST overbought, but that what you typically see when you get a bullish thrust from a correction or bear market bottom. A rare Zweig Breadth Thrust was triggered recently, which has strong bullish implications for the next 6 and 12 months. In fact, it has a perfect record for these times frames. 

I've seen some people on twitter debating whether this signal was actually triggered, but I saw a similar study from sentimentrader which gave the same message and so I am going to conclude the signal is valid. Of course, there's not guarantee that any signal is going to work this time and it does not preclude the possibility of significant weakness in the short term. 

I can certainly understand how one can be quite skeptical of any bullish signals.  After all, it appears almost certain that there's going to be significant economic weakness for the next  quarter or 2 given the collapse in container shipments and reigning in of capital spending as a result of the tariff turmoil. But this is widely known information isn't it? So, is the market in denial or could it be already looking across the valley to a more sanguine environment? Here's how the latter could transpire: Trump makes  "deals" or at least provides a framework which suggests tariffs aren't as bad a initially feared. Another possibility is that imposed tariffs either get bypassed or uncollected to a significant degree. The proper collection of tariffs is something that is not getting any attention. How are understaffed customs agents going to properly enforce the enormous amount of tariffed goods, many of which could have complicated tariff rates/rules applied to them?  Ultimately, the bullish resolution could be that somehow, some way the tariff threats turn out less than feared. It obviously takes a leap of faith to believe in such a narrative and the path to this narrative could very well have twists and turns, but here's the thing....if you wait for things to turn rosey again before deciding to buy you will probably end up doing so at all time highs. I said the same thing a few times from late 2022 to early 2023. You have to pay up for certainty. Back then the fear was that rate hikes were surely going to cause a recession. Now, the narrative is that tariffs are surely going to cause a recession. Then, just like now, it was difficult to go against this negative view. 

As always, I will defer to the indicators and market action and right now despite a ST overbought condition which is likely to result in some market weakness, it suggests to expect an optimistic resolution to all this turmoil somehow, someway at some point. It certainty doesn't feel that way (I certainty have strong doubts) but it rarely feels that way when there's a crisis of some sort. It requires a leap of faith.  I see lots of calls for a re-rest of the lows. While I expect there to be some ST weakness, I don't think we'll see a retest if the bull case ends up playing out....we'll just have to wait and see what happens. 

Much needed sentiment reset but not out of the woods

Coming into this year I was not bullish on the market for 2025 as I had noticed several red flags. In a nutshell, there was too much bullishness, too much complacency. The orange swan event of recent weeks has washed away and reversed such conditions creating a reset in sentiment. There's now plenty of evidence showing that the market may have either hit a bottom or in the process of forming one given the major retreat in positioning and expectations.  Here's some charts which show you what I mean:

Coming into this year, the consensus view was rosy for the markets with the average price target implying a 10% gain for the year. Now, the median price target has dropped to about 6000 on the SPX  as many firms have been scrambling to cut their targets and the consensus call now is that we are going to have a recession. There's obviously good reason for this sudden about face and pessimistic outlook, but I would be a lot more concerned if most stategits and fund managers remained hopeful and didn't capitulate. This reset in sentiment is much needed if the bull market is to eventfully resume. 

I like to use my "waking up from a 5 year coma" example in an attempt to view the market objectively, without being emotionally influenced by current narrates as you wouldn't know what they are. So, if you just woke up from a 5 year coma and I showed you the above charts along with an overlay of the chart of the the SPX, you would have to objectively conclude that the market would appear to be in a strong buy zone if you had a long term horizon. You would have to conclude that this decline looks like a severe correction/short lived bear market. History shows that if you put your faith in the indicators when they show extreme risk aversion and starting buying, you will get well rewarded...perhaps not immediately and perhaps with the market going down further in the days, weeks or even months ahead,  but in 9-12 months. Of course, it's difficult to have faith things are going to work out when you are aware of the narratives which are bleak and if you're watching the market every day, tick by tick while being blasted by news headlines like so many people do. Eventually, emotions and impatience gets the better of folks and they shit the bed.

Near the depths of the 2020 crash, the 2022 lows and now, I had this hopeless feeling that we were going to be fucked.  Maybe this time we will actually be fucked by this orange clown who is wrecking havoc, or perhaps things will somehow, someway not end up as bad as feared. Here's the thing...whenever you have a crisis, whenever moods sour so suddenly like they have now, it can create strong reactions/responses to mitigate or undue the very source of the crisis. I'm sure you've heard of the notion that if you put a frog in a pot of water and slowly increase the temperature, it would remain there and eventually get cooked without realizing it, but if you put a frog in a pot of boiling water it would jump out immediately.  The fact that we have seen an immediate and severe adverse reaction to Trump's tariff plans, has businesses already scrambling to make adjustments and/or plead with Trump to change course. It's also sounding alarm bells within the Republican Party and the courts to take action against Trump. But swift action needs to be taken now and damage is already done. Business confidence is shaken as plans are being put on hold and I'm sure economic activity has slowed as US imports from China have falling off a cliff. There's also going to be significant drop in tourism from foreigners and there's been dumping of US dollars and bonds. What a mess. On Easter Sunday Trump posted a hateful Easter rant about Democrats and Joe Biden on his Truth Social platform. What a piece of orange shit. And we have 4 years of this asshole. He's also been critical of Powell indicating his willingness to fire him. All of this just leaves a bad taste in people's mouths at a time when there is so much market uncertainty and fragility. 

Bottom line here is that we are seeing extremes that in the vicinity of where prior major corrections lows were made, but the scenario we face today has such ominous implications to take the market to significant new lows unless we see a major back peddling by Trump. Trump looks at the markets as a sign of approval and right now the market is sending the message loud and clear.  You always have to keep in mind that the market will price in all widely known information. There has obviously been a significant downward re-pricing of expectations, bracing for a drop in expected earnings for this quarter and probably next quarter. The question now becomes has the market priced in enough? The above charts suggest a lot of negatively has indeed been priced in but you can't assume the worst is over until market action proves it. Bulls do not get the benefit of the doubt. 

History shows that in a bear market, it typically starts off as a moderate more measured decline and it's only in the final or later phase where you see the scary, waterfall type declines as this is indicative of emotional, panic selling and forced selling from margined players. Strictly by observing the waterfall type action we're seeing, it would suggest we are in the final or later phase, rather than the beginning of a bear market.  It is reminiscent of what we saw in 2020, 2018 and 2011. Positioning/sentiment also supports this notion. Going further back to the GFC we saw the major waterfall phase of the decline in October 2008 by which the low then retested twice in November and March via lower lows as market internals showed positive divergences. Of course, the GFC was a once in century type storm. Although the current crisis can have the making of being a once in a century type storm, it is largely self-inflicted and can be undone although some damage would likely remain. The leverage in the non-government system is also nowhere close to what existed in the GFC.   

Market action will give you clues as to when this shitstorm has passed. During a true recovery, aside from the initial rally near the bottom which tends to be strong, you will see the market advance with resiliency and lower volatility accompanied by skepticism of its sustainability. Until we see this type of action, you have to assume we are in the grips of a bear market and respect that. So far, it has been the US market which has been hit the hardest, with International holding up a lot better, but if the US meltdown accelerates and hits new lows, I doubt International markets would continue to be safe havens. We are also seeing gold soar. This is clearly an indication of fear and a vote of non-confidence in the US dollar. This decline in the USD and rise in government yields is admittedly alarming, but the parabolic nature of the run up in gold as of late is also indicative of where we may be in the market cycle for gold and USD. Gold had been rising steadily and quietly for several months, but now is going parabolic which is what you tend to see near a major peak.. the oppose of the waterfall action you tend to see near major lows. Parabolic rises and falls are indicative of emotions and reckless momentum trading. Of course, it's always difficult to know how long it can carry on for, but history shows that time is NOT on your side if you betting for such trends to continue without a least a major correction. Here's another indication of where we are in the sentiment cycle when it comes to the US dollar. The cover on the left was in October and the cover on the right was from last week. My how times have changed so quickly.

Bottom line: Things feel really hopeless and there are clear signs of bearish extremes which you typically see near a major low, but you have to respect the market action which is not good and we can certainly make new lows here given the economic consequences of what Trump is doing and the damage in confidence he has created. Market action will tell you when the coast is clear and right now it's a hard no.  

Orange Swan

Holy shit. That pretty much sums up what's been happening in the market. After my last post, the market made a marginal new high before getting the biggest rug pull of all time. In my previous post I mentioned that if the trade war escalates again, it would create market turbulence again.  Well, it started off as moderate turbulence as Trump went back and forth making threats and then backing down/modifying them. Then he dropped the bombshell when he announced his "liberation day" reciprocal tariffs with his idiotic chart showing what tariffs other countries were supposedly charging the US, when in truth the "tariff" for each country was their trade deficit divided by imports.  This was far worse than what the market was expecting and the market has imploded since dropping 20% from the recent peak making this the 3rd bear market decline (20%+) in 5 years which is unprecedented. This weekend Trump explicitly stated what he has always believed going back 30+ years which is he wants to eliminate trade deficits with all other countries, due to the US being "ripped off".  Very few people, me included, thought he would go this far and this is why the market has collapsed. 

Noted tech permabull Dan Ives provided a very dire assessment to the consequences of these punitive tariffs which take effect April 9 due to the global nature of the supply chain for tech companies. It would also be terrible for autos and lots of other businesses. Trump just basically dropped a bomb on the economic plumbing of the world which took decades to develop all because of his boneheaded belief that trade deficits are bad, as it means you are being "ripped off". Trump, Navaro, Lutnick and the rest are clueless stooges.

Take a step back and look at the stats. The US is the most dominant, and arguably most prosperous country in the world. Median American real personal income has been in a  rising trend for decades and is one the highest in the world all while having a trade deficit every year since the mid 70s. "But it's unsustainable" is the rhetoric. Really? Why? Look folks. don't believe in the bs that Trump and Co. are spewing. Here's a simple example to understand why a trade deficit is not necessarily bad, and can actually be good. A real estate agent has a "trade deficit" with his assistant, paying him $50,000/year to book appointments, answers emails, do marketing, ect. This allows the agent to focus all his time on meeting clients and closing deals which results in him maximizing sales resulting in $400,000 in commissions/year. So, the agent wasn't getting "ripped off" having a trade deficit with his assistant. In fact, he benefited from it. If instead he eliminates this "trade deficit" and does all the work himself, he will have to spend a significant amount of time and effort doing admin and marketing himself, which means less time to spend meeting clients and closing deals. Also, he will probably not be proficient in doing the admin and marketing which will further decrease his deals. In the end, he is worse off. This is obviously a simple example, but you can see the point. By using comparative advantages, countries establish trade which in the end is a win for everyone in aggregate. Yes, I know that there's unfair trade practices (which should be addressed), and people can lose jobs to workers who do it for cheaper in foreign countries which forces them to find another job. It's not a perfect system, but it's the nature of capitalism which has led to the prosperity and standard of living we enjoy today which is far better than what we had several decades ago. Of course, there are still major problems we face today like housing affordability to name one, but again, look at the stats overall. Anyhow, I digress.Trump and his stooges wants the US the manufacture everything again. No chance that is going to happen. Tariffs or no tariffs, the economics don't make sense. And do they want Americans to go back to working in shoe and textile factories again? Come on man. It's asinine. With the more value added manufacturing jobs, again, the economics have to make sense. If you want those jobs to return, focus on tax reform and other incentives targeted to specific industries if it's feasible. 

Over the weekend a lot of folks including guys like Bill Ackman were begging Trump to reconsider these ridiculous, punitive tariffs, but he didn't budge and told everyone to "take their medicine". People are still holding their breath that this could all still be a big bluff as per Trump's Art of deal tactic of asking for the moon and then settling for less. It's obviously still possible as there has been reports that countries have reached out to Trump but I'm not going to hold my breath at the this point. This clown needs to be reigned in by his own party and that's going to require 2/3 of congress to vote on a bill that would cede Trump's power to issue these tariffs. That's a huge ask as it would require a significant amount of Republican senators to turn on Trump. Some have already start to consider it as they are being pressured by business and farmers, but again, I won't hold my breath. It would probably take considerable damage and time for them to act which by then would be too late. 

This is an orange swan event, I'm not going to lie, this has a 2020, 2008 feeling to this.   If I just look at the indicators, despite seeing some extremes, I also saw too much hope and desperation over the weekend which told me we weren't done yet with the selling.  To get a true washout you need to see capitulation.  I'm not sure if today's crash opening was it. The VIX did hit 60 which is obviously quite high and ticks the box of being an extreme, but keep in mind the VIX hit 80-90 in the GFC and Covid meltdown.  Today, even the safe havens of bonds and gold have been selling off. There's no place to hide.  I have a nauseating feeling when I look at the market. In the past that meant that a ST low was probably not too far off from a time perspective, but again, I won't hold my breath. If this post ends up marking the bottom or close to it, I will gladly accept this post being the ultimate contrary indicator, but deep down I don't think so. 

Edging

The markets have been resilient since my last post. After a brief dip earlier in the year, we are now a whisker away from new all high on the SPX despite all the hand wringing about tariffs. What happened on that dip was a mini-reset in sentiment probably as a result on the tariff drama and Trump's antics. I've had several clients express concern about Trump. My clients are Canadian of course, and I would say most Canadians despise Trump. I tell my clients what I often say here which is that the market is already aware of widely held concerns and thus will typically discount it quickly. It's the unexpected bad news which cause the big corrections/bear markets. Tariffs were largely anticipated from day 1. Yes, the degree of the tariffs were not necessarily fully factored in as there is some expectations that Trump was going to go in hard initially and then back off as a negotiation tactic. This appears to be playing out and is perhaps why the market didn't tank more than it did earlier this year. If however,a tariff war escalates a lot more than what's presently being expected, it will likely create market turbulence again. 

We now have a situation where the market is a stone's throw away from new all time highs, yet AAII sentiment is almost 2:1 bears vs bulls with some other indictors also showing room for bullish animal sprits to rise such as BofA bull/bear indicator at a neutral 4.7. No, it's not all all clear as other indicators are showing excessive bullishness. This is why I stated we saw a mini-reset in sentiment, not a full reset, but there's enough pockets of negative sentiment to provide fuel for a break out to new highs. 

Probably the most recent significant news event was Deepseek. There's a lot of debate about it but from what I gathered, it's a gamechanger and is bearish for the AI hardware providers. There's a lot of debate as to how Deepseek's impact will play out. I saw one video of this guy show how he was able to use  Deepseek on his own private, closed network at a minimal cost, thus avoiding the need for expensive cloud computing servers with data privacy exposures.

It appears we have a market that is edging. Just when I thought we were about to see a bullish euphoric climax, we instead saw sentiment back off just enough to keep the party going for a little while longer.   I had mentioned in my prior post that 2 major pieces missing to mark a bull market peak is IPOs and margin debt. Both have been on the rise but are not at extremes, especially IPOs. Perhaps this is what we need to see before the ultimate bull market peak in is. 

I've also see some quant studies which are pointing towards strong gains this year. So, does this mean I should ditch my bearish posture for 2025 and be bullish for 2025? It does suggest I be more open minded to this for sure. At the very least, it suggests I be more pragmatic and that the edging nature of the market suggests that the peak may come later this year or even next year. As usual, I will adjust if/ when the data suggests that I do.  I have no problem being a flip flopper. Folks, this is not about picking a side and being loyal to it.  This is not a fucking marriage. This is not a religion. This is about being on the winning side. Period. Fuck your ego, your pride and your dogma. Do what works to make money. 

Outlook 2025: Red flags a plenty

This is that time of the year when I look back and look ahead as to what might be in store. Looking back, a year ago at this time I pointed out how expectations for 2024 were low despite some chatter/hopes for a soft landing. At the time there were also still plenty of doubters calling for a recession such as jokers like Gundlach who had been repeating the same call since 2022. The median price target issued by Wall Street Strategists for 2024 was for a measly 2% gain. This low expectation environment made me bullish for 2024.  Not only did the market make fools of the majority but it even surprised the most bullish of the bulls and it did so with below average volatility. We had one, 9% correction in July and a  few 3-5% corrections.  Folks, how many fucking times do I have to remind you of the motto of this blog? It is there for a reason! In a nutshell, 2024 was a great year because we transitioned from the skepticism phase of the bull market to the optimism phase. But now we are seeing clear signs of excessive optimism and reckless speculation which is no bueno. 

I started seeing the first signs of excessive optimism in July as I had pointed out at the time. There's been plenty more red flags piling up since....where do I start? Positioning by fund managers towards equities and cash levels are near historical highs and lows respectively, which is the the opposite of what was the case at the depths of the 2022 lows.

Equity fund flows have been massive this year, especially since the election. On December 5th at the recent peak, there was about a 14:1 ratio of leveraged long vs leverage short ETF positioning. The last time this happened was December 2021. 

Just like in 2021, we are seeing ridiculous speculation in crypto led by charlatan Mike Saylor shamelessly pumping BTC saying stupid shit about how MSTR market cap will surpass Microsoft.  You have ridiculous meme coins like DOGE and fartcoin doing moonshots attaining a "market cap" of $1 Billion! Come on man. This is clearly a moment where you could look back a year from now and say "ya, that was a clear sign of an imminent market peak" because there is nothing more speculative than people trading meme coins, willing to gamble their money on pure air.  The fact that the action in fartcoin and other memecoins can even happen just proves what I've been saying about crypto all along....it is entirely a function of the greater fool principle. I will admit though, that I have woefully underestimated the degree and length of this crypto craze. As I had stated previously,  BTC had first mover advantage and so that's why it is more "legitimate" than any other crypto out there, thereby attracting the most money. But in the end, it is fundamentally worthless just like fartcoin and its value can only be sustained on faith and an ever increasing amount of money flowing into it. We may be at point now were a BTC crash could have systematic risk to the rest of market and perhaps even the economy...I don't know that for sure, but the risk of this is a lot higher than at previous peaks. 

Here's a survey which gauges the expectations of stocks by the average Joe...it's at the highest level ever. 

What about Wall Street Strategists? The median price target for end of 2025 is 6600. That's about an 11% gain from here. So, now these guys get bulled up after the market has risen 60% in 2 years and after being humbled 2 years in row calling for 5% gain in 2023 and 2% in 2024?  Lol. Talk about Johnny come latelies.  We've also seen capitulation recently from some the staunchest bears out there like Mike Wilson and David Rosenberg.  Here's what Rosenberg said on Dec 5 (right at the latest market peak) "The remarkable surge in the S&P 500 over the past two years has truly surpassed my expectations, especially in the last twelve months. Given that this bull market has persisted long enough, those of us who have found ourselves on the wrong side of the trade must consider adopting a different strategy. My latest memo is in no way a throwing in of any towel, rather an effort to discuss and interpret the message from the market that may not actually be altogether that irrational". Lol. Sounds like throwing in the towel to me!

We've also seen a massive underpermance of value vs growth recently and large cap vs small cap, a disparity which is similar to that of 2000. 

The rout in bonds has accelerated this trend in recent weeks but the growth over value trend has been ongoing for years. Bonds by the way, are being shunned which another major shift in expectations. Coming into this year most strategists were recommending to be overweight fixed income as expectations for several rates cuts in 2024 fueled by recession fears no doubt. Now, the expectations for bonds are the opposite of what they were last year at this time as inflation fears have come back to the fore. It's expected that the Fed will pause and cut perhaps only a couple more times in 2025. 

In prior posts I mentioned that a surge in margin debt and IPOs would be the tell tale sign of a major top. We have seen the former pick up but not the latter. I would also categorize the increase in margin debt to be not be as extreme as it was in late 2021...at least not yet. 

Then there is the BofA bull bear indicator. This is one of  my favorite indicators. It is showing a bizarre divergence from the vast majority of other indicators which are flashing red. Unlike most indictors which showed a burst in exuberance since October, this indicator went the other direction and has declined from 7.2 to 3.4 and may be even lower now!  

What is going on here? This indicator is based on global flows and positioning, not that of the US. The main driver of souring in sentiment is global fund flows, nemely,  massive outflows in China/emerging market stocks. In my October post I pointed out the opposite taking place and how my hypo-meter was flashing red for China.  Well, now that the hype has died down, I would say China and emerging markets are in a better position to form a base. Positioning in hedge fund and Long Only managers are neutral overall and even when the BofA indicator was at 7.2 it never hit the sort of extremes we saw in 2021 just prior to the market peak. So, in conclusion,  the BofA bull/bear indicator has not flashed red like the majority of other indicators I look at and is actually not far away from giving a buy signal! Remember though, this indictor pertains to global markets, not the US. 

So, in conclusion, there's plenty to be concerned about in 2025 as the wall of worry which propelled the bull market in 2023 and 2024 has all but crumbled.  There are bulls like Ken Fisher who still think we are still early in the optimism phase of the bull market. Sorry Ken, I can't agree with you here. Valuations are high, speculation is palpable and complacency has replaced concern. Back in July I postulated that we were in inning 6 or 7 of the bull market. Well, I say we are in inning 8-9 now. I'm calling for a down year in 2025, flat at best. There could however,  be pockets of opportunities in value, small cap, emerging markets and bonds. I will discuss this and more in my next post. 

Orange Optimism

I meant to post this earlier but I've been tied up. The election was a disaster for the Democrats as they were soundly defeated including a sweep in all the swing states. In hindsight everything is 20/20 as they say, but there was some writing on the wall hinting that Trump was likely to win due to the global shift towards the election of right leaning governments. People are tired of heavy handed government regulations/laws which impinged on freedoms and tired of mass immigration. It all started with the COVID lockdowns and vaccine mandates. Add to this the woke movement in which you had this fringe minority able to get a loud voice. I'd argue that wokeism was more prevalent in the US and Canada vs most other countries. These past 2 years, I got a clear sense that people were really fed up with this nonsense and were rebelling against it...and rightfully so in my opinion. The democrats did not appreciate or recognize this shift towards the right. They should have shifted more towards the center. Also, having Kamala as their nominee didn't do them any favors. She didn't earn the right to be there and did not have enough carisma. Being a women and of colour probably worked against her too.  The nasty, serial lying, convicted felon that is Trump did not deter enough people from voting for him even though he looks more unhinged than ever. Some smart people who voted for Trump like Bill Ackman downplayed Trump and his poor character by never mentioning it, emphasizing his team and the proposed policies of the Republican party. Imagine if you woke up from a 10 year coma and were asked who do you think would win a US president election a) a convicted felon or a b) a former district attorney?  lol.  

Leading up to the election night, the market had pulled back modestly. Recall in my previous post how I noticed the elevated VIX as a sign of hedging election uncertainty. I also mentioned that this tends to be wall of worry behavior which creates a coiled spring action once the uncertainty has been lifted. That's what ended up happening with extra emphasis given that prior to the election, a Republican victory would be viewed as bullish for the market given the 2016 "playbook". The big rally we got was accompanied by a big collapse in the VIX. We also saw crypto do a moonshot since Trump had been hyping btc. A lot of folks felt compelled to chase risk assets on all this Orange optimism. Count me out. 

Prior to this moonshot, the market wasn't sufficiently oversold and cleansed of the excesses I had pointed out in my prior post.  This post election rally reeks of emotion, fueled by hedges being dumped en masse. The other issue with this rally is the steep rise in yields. A prolonged trend of rising yields like this tends to eventually short-circuit an equities rally. Yields have been rising primarily due to inflation fears from proposed tariffs. 

The message I have continues to be one of patience. Chasing the market after it had a knee-jerk, emotional response placing it in an overbought condition, already up massively YTD, accompanied by hostile yield trends, is simply a very poor risk/reward set up in the ST. I don't give a fuck if the market just keeps going higher. I will not have FOMO.