This is the motto of my blog and for good reason. How many times have I cited this? The market has continued to advance since my last post as more evidence of inflation cooling has presented itself, i.e. the July CPI and PPI releases. Once again former and current Fed officials are trying desperately to piss all over this, hand wringing that the Fed funds rate must continue going up to fight inflation. They and others are pointing to the recently released strong payroll report. The market is so hyper focused on single data points, you can see the emotionally charged movements in the first hour of trading after such reports are released which more often than not is best to fade such moves intraday.
There's no shortage of people calling this a bear market rally. We will only know so in hindsight but what I will say is that here's a tremendous amount of skepticism about this move, however, I believe the easy money has now been made. NAAIM sentiment jumped back to 71%. this week. Put/call ratios have shown flashes of complacency early in the morning on those emotionally charged moves only to ramp back up by the end of the day which shows people are still very eager to picks tops or hedge. Fund flows this week were only mildly positive but that could change by next week.
The market this year has now punished just about everyone. The bulls in the first half of the year and the bears so far in the second half of the year. The gold bugs and commodity bulls (many of which are equity bears) got their punishment too. What's the motto of this blog again? There's this one guy on FinTwit (I won't name) who comes across as a very knowledgeable and sophisticated guy who for months has been explaining why it's best to remain bearish. Just the other day he admitted to getting stopped out of shorts on July 31. All his rants counted for nothing because he couldn't take the pain of counter trend rallies as is the case with most shorts due to the unlimited loss potential of being short which makes them inherently weak holders. Therefore, when too many bears are positioned the same way they become their own worst enemies and their fundamental arguments won't be worth of shit as they won't be able to short and hold during a strong rally. All bull markets start with short covering rallies but all bear market rallies end with them. So, which one will it be? As I mentioned, there's a lot of skepticism about this rally and I get why, but as I stated before, the longer you wait for evidence that the worst is over, the higher the price level the market will be when you get it which at that point makes it difficult to pull trigger as you then may feel that you missed the boat or keep waiting for a big pullback that never happen. Having said this, I think there will be an opportunity at some point to get in at better prices if this is indeed a new bull run.
I've been reading about the notion that this can't be a real rally because we didn't see true capitulation as evident of retail fund flows. I have been harping on retail fund flows since January but there has been a notable shift in behavior which I have pointed out. Also, although retail didn't show true capitulation, the so called pros did as evident by the positioning of hedge funds and active managers which showed extreme risk aversion at the lows. So, it could very well end up being that it's the so called pros who are the contrary indicator because it's they who capitulated! These pros are just as emotional as the retail investor, if not worse which is why they woefully underperform the market in the long run.
The bottom line is this. It's very difficult to distinguish a bear market rally from a new bull market rally as it can only be done in hindsight. However, there are some clues, one being the level of FOMO vs skepticism about the rally. There are some signs of both now which makes the short term dicey but there's still a very healthy amount of skittishness out there.
On the negative side you have the big rally in meme stocks and crypto and VIX sub 20 which is what we saw in early April marking a top. On the plus side, credit spreads have contracted notably and fund flows are still showing caution on the margin (but that can change very quickly after today). Positioning is also still very cautious from fund managers. Add this to the list of charts I've been showing since May showing extreme bearish sentiment on par to that of prior major lows.
And here's the cincher. There's this trader (I will not name) who writes for an online publication and he's notorious for signaling tops and bottoms based upon the language he tends to use. Since July he's been saying that now's not the time to be building long term positions. When I saw him saying this I went back to the 2020 lows to see what he was saying back then and low and behold in April of 2000 he said the exact same thing! I will also point out myself as being a contrarian indicator. I too have been thinking that things are utterly hopeless as I have at prior market lows. I'm not ashamed to admit that. I have no ego when it comes to the market which allows me to quickly change my posture.
So, bottom line is that the weight of evidence suggests this is a new bull market rally however in the ST the easy money appears to have been made and the emergence of some froth suggests you not chase. If the market keeps going higher, so be it, but the risk/reward in the ST doesn't look appealing. I would suspect that any gains from here would be given back at some point but if we go by the Rev indicator, now would indeed be the time to be building long term positions!
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