Not enough people in the pool

Well, so much for my call for a consolidation. The market has barely taken a breath since my last post and it's been nothing but an ass whipping for the bears but now market is ST overbought again.  The common refrain I hear explaining the strength of the market is anticipation of a US/China trade deal, but how many times is the market going to rally for the same reason? I believe the more likely reason for the relentless strength is the continued high level of skepticism from market participants as evident by equity fund flows aided and abetted by trapped bears at lower levels who are capitulating one by one. Amazingly, net equity inflows are still pretty much 0 despite the SPX  now being up 13% YTD! I figured by now we would have seen at least a moderate weekly inflow, but no!  AAII bull bear ratio has been hovering from neutral to moderate bullishness, not showing the type of extremes that make for good short term selling opportunities. The put/call ratio has been declining but at any hint of market weakness it's quick to rise indicating yet again that too many trader types have their guard up. All in all that's wall of worry behavior folks and I know very well this can all change on a dime but until you see evidence of a lot more people getting back into the pool, history shows there won't be enough fuel to spark a decline of major significance i.e. 5%+.  What will get people back into the pool? Perhaps clear evidence that growth is resuming again or maybe concrete news that a US/China deal has been sealed.


Here's another thing to note which ties into the same notion that downside will be limited as it stands now. Long term bond yields have been relatively subdued during this rebound. Bears have been pointing out that this is con-confirmation of this rally as it is pricing in slow/contracting growth ahead. That could be true but it could also be a reflection of disinflation, excessive pessimism and/or  European fixed income money looking for better yields. The German 10 year is 0%!  Whatever the reasons are, the fact of the matter is that if you look at recent history, the vast majority of the market's major corrections have happened after there has been a period of  sharply rising bond yields not declining yields.

You know what this rally reminds me a lot of now?  2012.  Back then like now we coming off a major market low by which the market dropped 20%. Back then like now economic growth was at stall speed and risks of a recession were elevated.  Back then like now the market rose relentlessly yet bond yields stayed stubbornly subdued for months. So what ended up happening? It wasn't until finally in mid March of 2012 that bond yields had a significant spike.  The market topped shortly afterward and eventually had a 10% correction but after that it was upwards and onward again as bond yields sharply dropped again and pessimism rapidly returned providing the fuel for the bull market to resume.

Bottom line: The risk reward on the long side is no longer worth it in the short run but the underlying skepticism that exists make the prospect of a large correction unlikely as the way things stand now. I believe a juicy short side opportunity will present itself when we see at least 2 of the 3 things happen: bond yields spike, notable equity inflows and AAII bull/bear sentiment 2:1. Until then, keep trades small and nimble or don't trade at all....don't trade for the sake of trading and don't ever try to get "revenge"on the market for a losing or missed trade. It's OK to just stand aside and do nothing. The market is not going away...wait for the prime opportunities.