Wait and see

Some interesting things have happened since my last post. We had Fitch downgrade US debt and some notable bears like Mike Wilson from Morgan Stanley threw in the towel. As far as the debt downgrade goes, it's still clear to me that there's a continued misconception about the nature of government debt. Seems like these rating agencies didn't learn anything from S&P's downgrade in 2011...meanwhile these are the same jokers who slapped AAA ratings on subprime MBS. Wrong in both cases.  Unlike you or me, a  sovereign currency issuer like the US has the ability to literally print as much currency as it wants to pay its debts. If they held debt in another currency, that's another issue. But as we've seen earlier this year and in prior years, the US places a self-imposed constraint with the debt ceiling which ends up being an excuse for political gamesmanship So yes, technically the US can default but only if they deicide to shoot themselves in the head. As idiotic as many politicians are, they know that the consequences of a default are to be avoided and so it always will be.

Some of the extreme bearish positioning that has underpinned this bull run since October has been unwound along with a few bearish strategists  throwing in the towel for their recession calls in 2023. These developments are only natural after such a bullish move in the market. What we need to ask ourselves is have we used up all of the bear fuel? I don't believe we have from a longer term point of view but the ST does appear to be sketchy. I've seen quite a turnaround in the positioning in  hedge funds types to moderately overheated levels. These would appear to be trend following, CTA type funds whom I would classify as weak longs as they would no doubt bail once the momentum turns against them.  But if you look at the overall positioning crowd there is still plenty of fuel in the tank as there are plenty who position based upon their perceived notion of fundamentals and there's still plenty of skittish folks. Those bears who have capitulated are not exactly bullish, they are just admitting they were wrong with their timing. They still think recession risks are elevated for 2024 and are only grudgingly accepting the chance of a favorable outcome, but they want to see more proof. One of these capitulated bears is Morgan Stanley's Mike Wilson. I read this morning how he acknowledged strong fiscal spending as a supporter of the economy as part of the reason why his recession call did not come into fruition. He, like pretty much everyone else, was instead fixated on monetary policy. Maybe Mike finally discovered my blog lol  I've said it here more than once that robust deficit spending was supportive for the economy. Morgan Stanley wants to see "a broader swatch of economic indicators" turn up including  rate cuts before being comfortable with the economy being in an upturn. Again, as I've said ad nauseum, if you wait for the all clear before jumping back in, you will end up having to buy at all time highs and at that point, you will probably hesitate again to buy because prices and valuations will appear high - I'm already seeing plenty of people complaining about valuations now.  

Despite  a ST  overheated market, there's still ample fuel left for this bull run. Rising bond yields are not equities friendly and at some point will likely matter, but anything could be trigger for a correction/  consolidation. Bonds have hurt both bulls and bears this year. Coming into this year bulls figured the Fed was pretty much done and so even if rates just stayed on hold a sideways market for high quality bonds would yield a 5%+ annual return.  Meanwhile, most bears were penciling in a recession and therefore immanent rate cuts which meant bonds would be a source of  strong capital gains. Some of the bears who I follow on twitter openly mentioned a few months ago how they were long bonds and one guy was also short stocks too. Other bears I saw last year  got long vol as a way to express their bearish views which was a disaster of a trade. All these fintwit bears got slaughtered and I haven't heard a peep from them in about 2 months. Maybe this suggests the bears are due for a reprieve.  July CPI gets released in a few days which is typically a ST market mover. If it's market friendly do not be surprised if we get another run for the highs before the market finally rug pulls later on in the month  or in September. All of this is just guesswork of course and I don't like to fixate on the very ST which is usually too random to call. But the bottom line is that in the ST (1- 3 months), it's not a  good risk/reward set up on the long side.  

The one indicator that sums up where I think we are in this cycle longer term is the BOA bull bear indicator. It hit the max buy zone of 0 in mid June and hovered around there for several weeks. It currently stands at 4.1. In the past, anytime it hit 0 and rose from the ashes, it signaled a new bull cycle which was not in danger of a top or major decline until it rose to  8. This does not means corrections of 5-10% can't occur in the interim. I'm not necessarily expecting that deep of a correction...we'll see. The other thing that makes me believe we are perhaps in the mid innings of this run is the lack of IPOs. I read today how IPO issuance in Canada has been very weak, on pace to being the worst year on record. IPO weakness is also the case globally. Major market tops tend to-coincide with IPO frenzies and right now it's still in the doldrums close to where you see major bottoms not highs. That can change quickly of course but until it does, the bull run would appear to have ample fuel in the tank to go higher longer term as we continue the unwind of  pessimism/cautiousness  to optimism/complacency.