Wringing out the weak longs, but could there be something more sinister at hand?

Well, I pretty much nailed the top a couple weeks ago. The reason for the cautious stance was simple. Too much of the weak traders which includes many of the hedge fund and trend following types piled into the long side. These folks are just buff sniffers, they aren't true "believers" in the bull market. They chase when markets go up and run for the exits when they go down. Now they are starting to do the latter. Recall trader Mr. X I follow? On Monday he commented ""this is just a corrective move not bear market behavior". That complacent attitude he had has now notably shifted to "there's no motivation to put cash to work now".  So, I think we're on the way to wringing out the short to medium term complacency that the market has. Some folks are hopeful that after the election we will have an element of uncertainty removed from the market and so it can start going up again. Don't hold your breath for that. Until we get the complacency fully wrung out of the market and the hot money gets defensive/bearish I would be skeptical of any bounces being sustainable. I said the same thing in late September. There's probably going to be a shit load of whipsaw action next week. 

What if we are at the brink of something really nasty i.e. a real bear market? Does market action and fundamentals suggest this? Well, the former is indeed showing some signs as it stands now. We got a potential double top and a market that has been dripping down daily for the most part. If you look at a long term chart of a market bell weather like Apple it has clearly gone parabolic. The thing that is missing though is marked change in fundamentals i.e. earnings. Last night Apple reported strong numbers but a disappointment came with Iphone 12 rollout delays. But look at this following chart with respect to Apple's price to sales ratio.

At the very least this suggests that you're not getting a bargain buying Apple  here. It would be one thing if a parabolic run up in a stock is being supported by accelerated sales/earnings but that's not the case with Apple. 

I made a postulation a few weeks back that NASDAQ 10K or lower could be in the cards. That might very will end up happening because despite the great earnings of these tech giants, too much hot/weak money may still be in these names. But, as usual, I'm going to let the indicators do the talking and navigate accordingly. A good post election shakeout may change the sentiment picture, but as it stands now, there's not enough capitulation in my view and any bounces will be of the dead cat variety. 

Another thing that troubles me is the behavior of bond yields. I have always said that prior to most notable sell-offs in stocks there tends to have been a notable rise in bond yields. As the market then corrects so do bond yields which helps build the foundation for the next rally as the TINA narrative and lower discount rates are supportive for stocks. We got the rise in bond yields leading up to the mid Oct peak but since the market has rolled over, bond yields have remained elevated. That's normally not a good sign for the market. The only other time I recall not seeing bond yields decline as the market was forming a bottom was that last waterfall decline from Feb 2009 to March 2009 to mark the bottom of the 2008 financial crisis bear market.  In hindsight, that may have been a sign that the bond market had correctly been pricing in better growth ahead. Maybe that could be the case here, but more often than not, when I see bond yields not declining during a stock market sell-off , it signals complacency and at some point bond yields will end up declining notably before the sell-off is over. Again, I will defer to the indicators and expectations. 

What about all the "pricing in" I was talking about in a prior post? The problem is that too much complacency and hot money flows built up to negate this...at least for now. Too many people were trying to play the contrarian and ended up becoming a victim of it! I still believe that deep down there is still that underlying pessimism and distrust of the market which is why I think there's still a good chance that we're not at the verge of a big bear market just yet. The big bear markets happen when the sky is blue, the outlook is rosy and monetary/fiscal policy is restrictive. We clearly do not have those conditions in place. But because of the weak/hot money positioning this correction has the potential to be a nasty one unless we really see a big u-turn in the sentiment indicators soon. Stay tuned for next week as the election circus unfolds.

Notice how I didn't even mention that it was the new lockdowns and/or lack of stimulus that triggered this sell-off. That was simply the catalyst not the cause. The true cause is the poor sentiment/positioning backdrop for when you have such a condition, the market is ripe to sell-off no mater what catalyst may present itself. 

Notable shift in ST sentiment

 Yes it's me again Mr. hypocrite chiming in on the market's ST prospects. A timing indicator I don't normally look at is Mark Hubert's stock market timer index which right now is at historical extreme high level of bullishness. Also NAAIM sentiment is back to historical bullish positioning. This to me is clear indication that the market is vulnerable here in the ST at least....we'll see what happens. 

Focusing on bigger and better things

Lately I have found myself fixating too much on ST wiggles of the market, but it's hard not to especially given all that's going on. I've stated before many times that the shorter the time frame the more random the market is and if you fixate too much on the ST you risk missing out on bigger and better things. Big money is made riding big trends. I've been guilty at times of being too fixated on the very short term, i.e. like trying to capture the next 2-5% move in the market.  When I look back I find that it is better not to worry much about the ST direction of the market until there's historical extremes in sentiment indicators which imply significant risk to the market of 15%+ . 

Now being the hypocrite that I am, let me give my 2 cents about the ST action we've been seeing in the market. We have gone from ST oversold to overbought. This was due to a combination of stimulus hopes and bear traps i.e. when Trump got covid and then called off stimulus talks. Both those events ensnared and ripped off the nuts of the permabear trading community making them angrier and even more bitter than before. The recent spiky move in the 10 yr bond yield and the CDN dollar (which still stupidly continues to act as a ""risk on" currency) is what we also saw in June and at previous ST tops. AAII sentiment, NAAIM and fund flows as a whole have incrementally grown more bullish but are nowhere close to any historical extreme. Over the weekend there's news of resistance to Trump's revised stimulus offer. Will the market gap down on this? I don't know, nor should I really care on the grand scheme of things. I need to focus more on the bigger picture which is this:  based on the evidence I see, I  believe the market is in a primary uptrend and will continue to be in one until we get a lot more people "in the pool" and that's going to be reflected by historic bullish fund flows/positioning from retail and professional. That's going to reflected in the narrative changing from "we're still not out of the woods with the recovery" to something like "global synchronized growth is back!" which at that point the pandemic will have passed or largely passed. Until then, we have a wall of worry type environment. Granted, that doesn't mean we can't get nasty declines but they should be short lived ones. Remember, the market pre-prices all widely known expectations/fears and so if any do come to fruition, the market reaction is either short lived or it's ignored. Right now there is a widely held fear that Trump is going to contest the results of the election if he loses. There is also the expectation that Biden is going to win. The Covid 2nd wave is also old news. So, any kind of negative reaction to any of the above will be short lived or ignored unless people suddenly become too complacent about it. Maybe a little bit of  complacey is creeping in as of late...tough to say for sure. Even if that's the case, complacency will likely to turn to worry and fear very quickly if the market starts selling off from here, because the underlying deep rooted skepticism is still there in my opinion. 

When it comes to focusing on bigger and better things one area I'm really keen on is green related sectors.Companies that have a focus on renewable energy and energy efficiency appear to have a really bright future.  Climate change awareness/urgency appears to have accelerated to the point where major action has to take place in the next 10-20 years. I read an article today about how the EU has plans to upgrade more than 200 million buildings including changes in heating and insulation to improve energy efficiency at a cost of $300B Euros/yr  for the next 10 years. When it comes to renewables, the economics are now making much more sense which was not the case 10 years ago. The movement towards socially responsible investing is gathering steam by the day whereby it's gotten serious attention from big money managers not just as a growth opportunity; but also because they are being increasingly scrutinized by how socially responsible  the companies of their portfolio are. Many stocks that are focused in these above areas have been largely bucking the trend of the stock market in general as of late and I think that may be due to an expected Biden win who is promising big spending in these areas. A sell on the news reaction could be possible here or something worse if Trump wins. But those are ST concerns. The LT fundamentals of this space are solid. 

So while everyone fixates about the covid second wave or Trump's next tweet, I'm going to start focusing on bigger and better things.