Give it time and keep an open mind

I've been warning since mid July about the market getting overheated and now low and behold we've see the SPX drop about 5% from the recent peak. Rising bond yields appear to be the main culprit which I also warmed about. So now what?  Has the froth I warned about been unwound? Well, a good chunk of it has.  Put/call ratios have soared, NAAIM exposure is back to 60%., AAII sentiment is 1:1 bulls vs bears, Fear/Greed index back to 45 and the market is a quite oversold on a ST basis as per McClennan Oscillator.  Thus, there's  enough evidence to suggest a ST bounce is immanent but I suspect that if we get one, it won't signal the end of this corrective phase that we are in. I suspect at best the market goes sideways until end of October - mid November. A bounce followed by a lower low at some point is probably the more likely scenario but like I've always said, be careful trying to predict every wiggle in the market because it's often a fool's game. I will defer to the indicators. Right now they are oversold enough for a ST low to be immanent but they would need to be more oversold in order to provide a high conviction, longer term bottom signal. We're talking about AAII bears outnumbering bulls 2:1, NAAIM at sub 40 and Fear/Greed at sub 25. There's no guarantee of course that we will get these readings before hitting a low - the market may find a low well  before or well after such readings are hit. 

The Jackson hole speech this Friday will likely be a market mover. There's no denying the sell-off in LT bonds is hamstringing the market. I noticed a large outflow in TLT last week and it appears to be quite oversold as well at it re-tests the October low. So what's behind this bond rout? LT yields are theoretically supposed to reflect the average of what ST rates are expected to be over the duration of the bond plus a maturity premium. It's obviously not that simple as there are  buying and selling of government bonds as the result of changing needs/circumstances of its various holders in particular, the big boys which are foreign centrals banks like China and China has been selling US bonds significantly as of late. Of course, for every seller is a buyer, but as with any asset, if sellers are more urgent to sell than buyers are to buy at a given price, the clearing price will drop accordingly.  Despite the bond rout,  5 year break even spreads of TIPs have hardily budged and continue  to be subdued, hovering around 2.2% which suggests this rout does not appear to be driven by a repricing of higher inflation expectations which would truly lead to a higher for for longer Fed funds. Fed fund futures pricing also confirms this.

Bottom line is that although there's been a good amount of froth unwound in the market and a good bounce can materialize soon, I wouldn't get too excited about the prospects of the market until perhaps sometime in the fall. Could this be the start of something more than just a bull market correction? Of course, and we need to give that some consideration but as of now I don't see that being the case. If we see lot of people buying the dip and other signs of complacency that would make me change my mind.