After taking it on the chin day after day trying to top tick the market for the past 2 weeks or so, the bearishly inclined trading community (which makes up the majority of traders today in my opinion) may have temporarily thrown in the towel. You can see this today as evident by the very low put/call ratio. Mind you, this is only one day....we could very well see these clowns pile into puts again on the first hint of weakness. However, I have to say that the charts look extended here when you look at how far the market is above the 200 DMA and the parabolic rise as of late. This suggests a breather at the very least is forthcoming. We're also starting to see "melt up" chatter which in the recent past has been a pretty good contrarian sign of a ST top. The trading community is basically throwing their arms up in the air saying "you can't stop this market because of the fed" which means that even though they may have given up trying to short the market they still don't believe in it. That's been the story for pretty much the last 10 years.
So, assuming that lots of bears have temporarily given up, the market has lost a source of fuel right at a time when it's looking a bit parabolic and overbought. As such, I expect to see the market cool off in the near future. For how long or how deep I don't have a good feel at this point.
But don't get me wrong....the underlying skepticism of the market is still there and we aren't seeing the type of exuberance that we saw in late 2017-early 2018. If the market drops 2-3% I expect to see pessimism ramp up again.
Tuesday, December 17, 2019
Friday, December 13, 2019
I expect pullbacks to be modest for now
Ok, so we got the "phase 1" of the trade deal signed which lifts some of the "uncertainty" from the market. I've said it before, this trade war is a fugazi. It's just a distraction/narrative for market participants to pay attention to. Ultimately, it's not going to have a material impact on the economy no matter how it's settled. Major downturns are not caused by this type of silliness. They are caused when a material underpinning of the economy unravels and spills over into other sectors. The US was never overly dependent on China, it's the other way around. Yes, the trade drama can cause significant ST noise but it's all just noise. Another thing that can cause a significant downturn in the market (but not collapse) is when you get too much enthusiasm from the crowd. This creates an overcrowded long exposure making the market vulnerable to a rug pull. A good example was the 1987 and 2018 declines whereby sentiment got overheated and the market had a serious rout with the economy still relatively fine i.e. not in recession.
I would speculate right now that we are in a position where a lot of "pros" and retail as well, are caught flat footed because they've been positioned rather defensively all year. The pros in particular are probably begging for a big pullback, but in such a situation were so many people are caught leaning the wrong way, it doesn't seem likely there will be one. I'm also noticing ST trader types and/or hedgers relentlessly trying to top tick the market because anytime the market shows even the slightest hint of weakness the put/call ratio spikes to 1 or thereabouts. This is creating yet another layer of support as these traders get their fingers burned over and over. You can see it the intraday charts. You can actually see a finger-like pattern in the chart which is indicative of shorts getting squeezed and stopped out. Maybe we''ll see a swift change in attitude shortly but until we do, don't hold your breath for a big pullback just yet in my opinion.
I would speculate right now that we are in a position where a lot of "pros" and retail as well, are caught flat footed because they've been positioned rather defensively all year. The pros in particular are probably begging for a big pullback, but in such a situation were so many people are caught leaning the wrong way, it doesn't seem likely there will be one. I'm also noticing ST trader types and/or hedgers relentlessly trying to top tick the market because anytime the market shows even the slightest hint of weakness the put/call ratio spikes to 1 or thereabouts. This is creating yet another layer of support as these traders get their fingers burned over and over. You can see it the intraday charts. You can actually see a finger-like pattern in the chart which is indicative of shorts getting squeezed and stopped out. Maybe we''ll see a swift change in attitude shortly but until we do, don't hold your breath for a big pullback just yet in my opinion.
Wednesday, December 11, 2019
The main purpose of the stock market is to make fools of as many men as possible
In these politically correct times I suppose I should change the title of this post to "the main purpose of the stock market is to make fools of as many people as possible" but fuck being politically correct, the original title stands. This phrase which is the motto of my blog was coined by Bernard Baruch, a US business man of the early 1900's. It's the most accurate description of the stock market that I can think of. The stock market is seldom obvious, seldom does what the majority expect it to do and the reason why is because the market is already aware of and therefore reflective of common expectations, views, fears, ect. So, if you want to "beat" the market you have to position yourself for how those expectations will be changing in the future.
Throughout this bull run that began in 2009 there has been no shortage of worries, no shortage of calls from "experts" warning us about immanent doom. Where are the "permabulls" who are calling for outlandish upside like Dow 30,000 in the late 90s? There are none to speak of. Yes, you can find bulls but they are relatively modest and few in number compared to the doom and gloomers.
I'm in the advisory business and all I've been hearing since last year is this "late cycle" narrative from the wholesalers I deal with. Everyone's on alert for the next downturn like I've never seen before and the "pros" have been positioning themselves accordingly. The inversion of the yield curve is what really got everyone going since it has historically signaled an immanent recession. I'm not going to divulge as to whether the yield curve signal was as strong or meaningful as in the previous instances due to global distortions. What is key to note is the frenzy of attention the inversion garnered as a harbinger of doom whereas in the past, the yield curve inversion was not as nearly paid attention to. It speaks to the underlying, deep rooted pessimism that still lingers from the 2008 crash. If we go by the motto of this blog, then we are probably not in the late cycle. It would suggest that the cycle still has at least 2 more years to go. When was the last time the investment "pros" as a whole correctly positioned themselves for "late cycle"? The answer is never. The 2008 collapse was a "surprise" just like every other major downturn. Another great example of a surprise was the collapse of oil prices in 2014-2015. How many "experts" were calling for "late cycle" oil prior to that collapse? The answer is 0. Literally 0.
My point here is that the time to really get worried about the long term is when there are no worries! We saw that type of no worries feeling in late 2017- early 2018 when "global synchronized growth" was the common mantra and retail was pouring money into the market. This ultimately led to a 20% correction which wiped out the optimism reverting it back to the pessimism that had been persisting for years prior to it. 2019 was characterized by fears of an immanent recession which never came to pass. Now we are starting to see green shoots of a rebound as Global PMIs have been turning up, so called "progress" on the trade war has happened and the Fed cutting rates appearing to be on hold for the foreseeable future. Yet this budding optimism, if you want to call it that, is still quite fragile because there's still quite the concern about what would go wrong on the trade war front, the repo market, politics, ect. The bottom line here is that there is still plenty of room for upside re-rating of expectations which would send the market notably higher in 2020. What the market does in the next few weeks is a tough call as it typically is.
Throughout this bull run that began in 2009 there has been no shortage of worries, no shortage of calls from "experts" warning us about immanent doom. Where are the "permabulls" who are calling for outlandish upside like Dow 30,000 in the late 90s? There are none to speak of. Yes, you can find bulls but they are relatively modest and few in number compared to the doom and gloomers.
I'm in the advisory business and all I've been hearing since last year is this "late cycle" narrative from the wholesalers I deal with. Everyone's on alert for the next downturn like I've never seen before and the "pros" have been positioning themselves accordingly. The inversion of the yield curve is what really got everyone going since it has historically signaled an immanent recession. I'm not going to divulge as to whether the yield curve signal was as strong or meaningful as in the previous instances due to global distortions. What is key to note is the frenzy of attention the inversion garnered as a harbinger of doom whereas in the past, the yield curve inversion was not as nearly paid attention to. It speaks to the underlying, deep rooted pessimism that still lingers from the 2008 crash. If we go by the motto of this blog, then we are probably not in the late cycle. It would suggest that the cycle still has at least 2 more years to go. When was the last time the investment "pros" as a whole correctly positioned themselves for "late cycle"? The answer is never. The 2008 collapse was a "surprise" just like every other major downturn. Another great example of a surprise was the collapse of oil prices in 2014-2015. How many "experts" were calling for "late cycle" oil prior to that collapse? The answer is 0. Literally 0.
My point here is that the time to really get worried about the long term is when there are no worries! We saw that type of no worries feeling in late 2017- early 2018 when "global synchronized growth" was the common mantra and retail was pouring money into the market. This ultimately led to a 20% correction which wiped out the optimism reverting it back to the pessimism that had been persisting for years prior to it. 2019 was characterized by fears of an immanent recession which never came to pass. Now we are starting to see green shoots of a rebound as Global PMIs have been turning up, so called "progress" on the trade war has happened and the Fed cutting rates appearing to be on hold for the foreseeable future. Yet this budding optimism, if you want to call it that, is still quite fragile because there's still quite the concern about what would go wrong on the trade war front, the repo market, politics, ect. The bottom line here is that there is still plenty of room for upside re-rating of expectations which would send the market notably higher in 2020. What the market does in the next few weeks is a tough call as it typically is.
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