Making the right choices

I left off stating that I expected a pull back/consolidation phase. Well, that lasted all but a few days and it was the shallowest of pullbacks before the SPX surged even higher touching 7500. This move has probably surprised even the most bullish of bulls but this latest surge has been almost exclusively driven by tech mega caps and it's causing plenty of hoopla on fintwit. Not a day goes by where I don't see folks making mention of the extreme divergence of the equal weighted SPX vs cap weighted SPX and how this spells trouble. The funny thing is prior to the Iran war we saw the opposite situation whereby equal weighted was trouncing cap weighted SPX and the message was the same...this spells trouble. Well, ultimately trouble did arrive  but it was the result of an exogenous shock, not something internal. There's 2 ways this divergence can resolve itself....either the mega caps "catch down" which would be bear case or we get the bull case whereby we see a significant rotation trade out of mega caps into the equal weighted names. 

I'm not sure how this is going to resolve but I do know this...there are still plenty of folks who are still out of the market because of the Iran war and Trump's unhinged behavior. It's similar to the dynamic that played out out last year after Liberation day. Folks were on edge for several months until they finally got comfortable around October when by then they finally acknowledged that things didn't get as bad as was initially feared. All those folks who bailed in March are now like dears caught in the headlights as the market is probably  10-15%  higher from where they likely sold out. This suggests to  me the market ultimately is going to reach higher highs whether this pullback these past couple of days deepens or not. Don't get me wrong....I'm far from feeling cocky or complacent when stating this. I feel anxious. I can't help but feeling like a lot of people are feeling which is that this middle East conflict is a cluster fuck that may result in a some sort of financial rupture if it carries on much further. 

I can't help but feeling more anxious than usual about things in general lately. I'm trying to figure out why that's the case. I think part of it could be because my screen time has been higher recently. I find myself looking at the markets too often during the day which I have vowed not to do. No intraday market watching is something I told myself and yet I can't help it. I tell my clients not to look at their portfolio every day and yet I have been doing the opposite, not only that, but worse by looking at the market several times in one day or sometimes just scrolling random crap in Instagram. I'm a pretty disciplined guy. I generally eat clean and make sure I get my workouts in every week, but sometimes I slip when it comes to screen time and if I, a person who is generally well adjusted and disciplined,  struggle with that sometimes then I know it MUST be a bigger problem for lots of people. It must be the main reason for increased anxiety in general and probably other health problems because the longer you are on the screen the less time you are doing things you should be doing to keep you healthy, both physically and mentally. 

I think most of us have an internal voice of reason/logic they can listen to, to make the right choices and help themselves. We KNOW what the right choices and decisions are but we often don't make them. The reasons for that is either because a) doing the right thing is difficult or unpleasant b) we have  reflexive impulses that makes us opt for instant gratification or comfort despite knowing it's ultimately harmful or c) we let our emotions or biases override reason/logic.  Imagine if we made the right choice for every single decision we had to make each day no matter how minor. We can choose either to make the bed right away or leave it when we wake up. We can chose to have a muffin or eggs for breakfast. We can chose to schedule a time to workout today. We can chose to run those errands or put them off. We can chose to call that person or email them.  We can chose to read 1 hour day instead of TV/screen time. We can chose to get 7-8 hours of sleep or 5-6 hours. The compounding effects of making the correct decisions for every single small choice we are faced with would be enormous. Don't be smart ass and argue that we can't always know for sure what the right decision is....I'm not talking about those...I'm talking about the decisions WE KNOW are the correct ones. This leads me to choice we all have when it comes to negativity. Choosing negativity over optimism as a general disposition when the latter is an option is the wrong choice.  Certain situations may not have the option for optimism like for example someone who is terminally ill, but for the vast majority of situations,  choosing negatively over optimism is illogical as doing so decreases your chances of success and quite frankly just makes you a miserable SOB which must be such a pitiful existence.  

What's the purpose of the market again?

The beach ball analogy I wrote about last post was spot on. The market has exploded to the upside just like I suspected would happen and to hit new highs. Once again for the umpteenth time the market did what it always does which is make fools of as many people as possible. I'm not sure if anyone reads these posts but if you're a long time reader and you're still not a believer in the motto of this blog you are in denial and you are probably a dogmatic investor which has only served to hurt you.

Ok, so what's happened since my last post? Well, we've seen continued talks/hopes to put an end to the war, but it's still ongoing. It's difficult to tell, but it seems there are different factions in Iran fighting for power. We've seen the US put more pressure on Iran by creating a blockade. Trump has been under tremendous pressure from all sides including that of this own supporters many of which have turned on him. I'm not a fan of Trump at all. He's a serial liar/gross exaggerator, narcissistic, and not to mention criminal.  But, he's resilient and heavy handed, the latter trait can be a good or bad thing. When it comes to dealing with authoritarian  or criminal enterprises, it's a good thing because things like diplomacy, leniency, a show of "good faith" don't work as these things are the opposite of how these people operate - they achieved and held their position through force, brutality, manipulation, and deception and as such ,you have to fight force with force. When you use "diplomacy" to negotiate with such people they will just take advantage and stick it to you which Iran has done repeatedly over the past several years.  Iran is an evil empire. When you brainwash kids with the slogan "death to America, death to Israel" how can you just sit there idlily forever?  I'm not sure if this was the right time to strike Iran, but when is the right time? When they have built up their miliary might and influence to the point where action is all but forced to be taken? By then it could be too late or more more difficult/consequential to deal with. When Nazi Germany first started wrecking havoc in Europe, the allied forces used "diplomacy" to appease them. Only when it was so painfully obvious that they had to use force did they act. Imagine if they would have used force sooner?  How much damage and loss of lives could have been spared? And if Hitler didn't make the fatal mistake of turning on Russia he could have very well been successful. The easy/diplomatic way to handle Iran was just to put sanctions on them and monitor them. That didn't work. They still found ways to smuggle goods in and out. So what do you do? You just sit there and let them accumulate/build up their military capacity? A nation led by fanatics that have openly admitted to want to destroy the Western way of life? 

Whether or not it was the right time to strike Iran, now that they have, the US/Israel need to finish the job despite the political pressure. The media is trying really hard to make it look like Iran is somehow winning this war which is a joke. Yes, they are clearly being defiant and creating some havoc, but to suggest they are winning given the damage they have sustained economically and militarily is a joke. Meanwhile, despite oil prices rising sharply, they aren't at a level that would be considered catastrophic. Gasoline prices in the US are currently a bit higher than what they averaged from the high gas price era of  2011-2014 which at that time didn't sink the economy. When you adjust for inflation, the gas price would need to be at about $4.60 today to be what they averaged in real terms back then. When you take into account today's vehicles are 15-20% more fuel efficient, you would need to see gas prices at $5.30+ today to match that high gas price era which didn't sink the economy anyways.

Let's get back to the market here. The fact that we have hit new all time highs should be a loud and clear signal that this Iran war is ultimately not going to matter as far as the stock market/economy is concerned longer term.  The market is saying that somehow, someway the economy will be resilient, whether that be via re-routing of cargo ships, an end to the conflict soon or whatever. If reading that last sentence makes you hot under the collar, you need to let go of your dogma and/or you hatred of Trump, Israel or whatever else is making you biased. You're not listening to the message of the market.  Could this rally end up being the mother of all head fakes?  Of course it can, but it's unlikely because by now, the market has has more than enough time to digest/price in the Iran war situation and it's telling you that it doesn't believe it will derail the economy, just like how it correctly saw through the tariff drama of last year. Does that means there can't be any flare ups/headline risks that create more volatility? Of course not, but it would likely end up being noise....this is what the message of the market suggests! Don't shoot the massager! 

Having said all this, the market hit extreme ST overbought conditions recently, put/call ratios have collapsed, NAAIM is at 94% exposure, AAII bulls have popped to 46% while bears dropped to 34% which is almost the inverse of what it was a few weeks ago. This suggests the wall of worry needs some re-building and the market is vulnerable to a pullback/ consolidation phase.  But, I very much doubt the average investor out there is feeling truly complacent about the market over the next few months given the war and continued blocking of Hormuz. I know this must be true, because I certainty feel uncomfortable/skittish about things.   And here's another thing....the longer you wait for confirmation that the war is over or that thing's aren't going to be as bad a you feared, the higher the market is going to be. You will have to pay up for certainty....and probably not too far away from he next market scare to hit!

  

Market in denial or like a beach ball held under the water?

We've seen the market snap back since my last post up about 4% from the lowest point of this decline despite oil rocketing up 11% to  $111 on Thursday after Trump's state of union address the night prior. I found this oil price reaction strange because Trump didn't exactly say anything new or that surprising. The market opened up down 1.5% but by the end the day clawed back to even. This must have been infuriating to the bears. I can just hear them yell "how the fuck can the market be flat with oil soaring like this?" If I was short, I would be very worried of this action. The market is acting like a beach ball being held under water....more on this later. 

Although Trump says that the straight of Hormuz is Asia and Europe's problem and that they are the ones who should sort it out, the US military build up suggests that they are planning to pry open the straight by force as I had mentioned in the prior post. Although the US doesn't heavily rely on energy supply from the straight, the impact of the high global pricing of energy is felt by everyone and if there's one thing we know about Trump is that he wants low energy prices...that has always been his mantra. If we don't do anything and just allow Iran and its proxies to be able to attack energy supply lines like this with impunity they will hold the world hostage anytime they want something. Yes, the US started this war and Iran is retaliating but now they learned something from this and would be inclined to use this tactic going forward. Iran is actually allowing some ships to pass so long as they pay a toll which means they are profiting from this situation, yet another "why didn't we think of this before" epiphany for them. The bottom line is that when it comes to war, diplomacy is not going to work. Only force works. Only when enough force has been applied does diplomacy eventually work as the nation who is all but defeated has no choice to accept it, especially a brutal regime like Iran. So long as the straight of Hormuz is in Iran's control, this war is likely not going to end with diplomacy. Last week a coalition of 40 Nations discussed diplomatic and economic strategies to open the straight, in other words. sanctions. This is probably not going to amount to much. Iran has been sanctioned to the wazoo for decades already. Macron says miliary force must not used to open the straight. Good luck with that. Why would Iran give up their biggest leverage in this war? But sure, go ahead and try to see if Iran will be "diplomatic"...just don't hold your breath. 

Let's get back to the markets. As of now with this latest little rebound, the market is only down about 5.5% from the all time high earlier this year. This is pretty incredible considering that oil prices have doubled in 3 months and 20% of the world's oil and gas supply has been cut off in addition to other things. There's 2 ways to look at this...either the market is in denial or the market is looking across the valley and sees this as temporary. Most evidence suggests the latter in my opinion. Oil futures for delivery in August and December are trading at $82.50 and $72 respectively. This is a massive discount to spot which indicates the market is pricing in much lower prices in the not too distant future...I know there's more to it than this but this is likely the main reason for this pricing. More often  than not, steep differences in futures prices to spot like this signal the spot price is unsustainable and destined to go the other way.  I pointed out this disparity last post, but now the situation is even more extreme because the longer dated futures are trading LOWER than they were 2 weeks ago despite the fact that spot prices are higher. Some people would argue that this is complacency, that this indicates denial. History suggests otherwise. 

Another thing to look at is the 5 year break even inflation rate implied by TIPs. I've quoted this indicator before as far back as late 2022 to suggest that the market was pricing in much lower future CPI inflation going forward from that time which hardly anyone believed. Well, it turned out that the market was indeed correct. While the TIPs market under estimated the actual inflation realized, it was directionally correct when spreads started falling significantly in late 2022 just like how it was directionally correct in mid 2021 when it was ramping signaling an inflation surge forthcoming while the US and CDN Feds had their dicks in hand saying "lower rates for much longer". So what's the 5-year breakeven spread saying now? While it has up ticked since the war broke out, it's currently at 2.56% which is near the higher end of the range it's been for the past 3 years and has not made a higher high despite oil making one on Friday. What this means is that the market is not expecting  inflation to dramatically surge otherwise it would have definitively broken out to new 52 week highs. The same message can be seen in the 2 year TIPs market, in fact, it's at 2.27% and  near the mid point of its 3 year range which is an even stronger signal that the market does not expect significant inflation pressures forthcoming in the near term. Once again, the skeptic would argue that the TIPs market is being complacent but history shows that the TIPs market tends to get it right....not necessarily right in the average CPI it implied (which can be off by 1-1.5%), but the direction of the CPI trend. 

I mentioned last post how some sentiment indicators have already hit extremes. Here's some more evidence of that

I would say that the sentiment reset overall is not extreme as it was last year at this time, but it's defiantly notable and enough to suggest that a bottom is in or close. AAII sentiment and II sentiment are now at pessimistic levels commensurate with some prior market lows. AAII bearish sentiment has averaged about 50% for the past 4 weeks, while the slower moving II bull to bear ratio is currently at 1.12 which is quite low. Ideally, I'd like to see it at 1 or less (which can happen this week), but at 1.12, that's already a big reset especially for a market that is off only 5.5% from the high. At the market high, the ratio was 4. So, sentiment has rapidly cooled. Can it get cooler? Of course, but it has cooled off enough for the market to resume its uptrend should the proper catalyst(s) slow up. Another thing I have noticed is how the put/call ratio has been at or near 1 throughout this recent pop in the market. That shows you folks are shorting/hedging aggressively into strength which usually means the rally has legs to go higher still. Ideally, I'd like to have seen NAAIM exposure be lower as it's currently at 68, but I know from experience, not every indicator is going to perfectly line up. 

The market has had plenty of time now to price in the situation in Iran. It has taken limited damage given what seems to be a very serious situation with the Straight closure which gives me the analogous feeling of a beach ball that is being held under the water...you can push it down but not much and once that artificial pressure is released, the beach ball pops up violently. I realize I could end up looking like a total clown making this claim, but this is how I feel about the market at this point. Always remember the motto of this blog. How would the market create the most amount of fools right now? By going down another 5-10% or going up 5-10% making new all time highs? It would seems the latter is a near impossibility at this point....and that's why you should be prepared for it. I feel squeamish making this post...let's see how it turns out. 

War

What a difference a month makes. In my last post I mentioned how the market structure suggested more downside was in store and lo and behold we got the downside I expected and then some. Unless you've been living under a rock, it's obvious why the market has been going down. Since the start of the year I've been more or less  been saying that the market was overheated...running on fumes is a term I had used. With the market down about 10% from the recent peak, we have seen a very significant reset in sentiment. In fact, some sentiment indicators have reset to levels seen near seen near major market lows. Here are a couple of them:

It should be noted that the CTA positioning chart was as of March 23 and so it is probably at an even lower reading right now. At the very least, it would appear that the market is near a ST low. Having said that, it would not surprise me to see further downside Monday...at least initially, just given how the market closed at the lows of the day on Friday making a new low for this move down. 

So, let's talk about this war. Why did the US invade is the question a lot of people are asking. In my opinion it was because of Israel. Israel always wanted this war because Iran has been a threat to them directly and though the proxies they support. They just needed an excuse to attack. Given Trump's "success" in Venezuela in toppling a regime and installing someone who was co-operative with the US, he was probably convinced by Israel that he could get the same result in Iran especially given the protests earlier in the year which suggested that Iran was ready for a change. There's no shortage of criticism about the US administration's handling of this war pointing out how they don't appear to have a gameplan and they keep changing the narrative. I have little faith in Trump's decision making ability during this war, but I'm more hopeful of the Israelis . These folks are sharp cookies when it comes to tactics. Just look at how they got to to those Hezbolah fighters with the explosive pagers and how they have been able to assassinate Iranian leaders so quickly. Most pundits are saying that the US underestimated Iran's capabilities, but do you think Israel did? I don't.  Given that Iran is their largest enemy they must have known all about Iran's missile cities and drone capabilities and so if they decided to strike them, they must have calculated that with the help of  the US, they can defeat Iran. You have 2 vastly superior forces against 1. Yes, the asymmetric attacks are a problem, but they can't be sustained given that the US and Israel have total air and Navy dominance knocking out targets at will. Iranian Ballistic missile attacks have slowed to a trickle and drone swarms are still a problem, but have slowed down significantly.

With 3500 US marines arriving in the Gulf,  a lot of people are worried that this signals an immanent ground invasion, perhaps of Kharg island. I seriously doubt that.  It's more likely they are being brought in primarily to secure the straight of Hormuz. If that can be established, Iran loses its only bargaining chip and so that suggests they would be more willing to come to the table sooner rather than later. 

Regardless of how this war turns out, one thing that is almost a certainty is that this will be a major boon for safe US, Canadian, and Australian energy i.e. LNG and oil as the war exposed the vulnerabilities of energy supply from the Gulf region. So, assuming that this war doesn't end up spiraling into a total catastrophe, Trump could  end up looking like an evil genius even though he probably didn't it plan to.  

December NYMEX oil futures are trading at $77 which is a significant discount/backwardation to spot price of $99 and tells you that the oil market expects oil prices to decline significantly longer term. This doesn't mean oil prices will drop tomorrow and there's no guarantee that the market gets this right, but when you see such a disconnect between spot and futures prices in commodities markets like this, in my experience I have found that the market does in fact get it right more often than not and the stats prove it. The last time we saw this degree of backwardation in the oil market was at the peak of oil spike in 2022 after the Ukraine war broke out. After the COVID meltdown the opposite condition was in place whereby longer term futures prices were much higher than spot. 

Final comments. It would not surprise me if we see further downside action early this week given the downside momentum that is in place and the scary headlines. However, given the condition of sentiment indicators, if we get some sort of downside puke, that would suggest we are close to or at a bottom. I certainly have a nauseating feeling about this market which suggests we may be close. I'm also not underestimating the seriousness of the current situation. It's terrible and things could get really worse, it's just that I see some possibilities/signs for things to get better even though the media is suggesting the opposite. 

Software glitch

The market structure right now is quite unusual. The average stock is doing well but the Big Cap Tech stocks have not thanks to the meltdown in the software sector sparked by fears that AI will be able to replicate what these firms do which started when Anthropic released  new AI tools. This has similar vibes to the "Deep Seek" sell-off from last year. One could suspect that a sector wide sell-off like this would present opportunity as the baby is being thrown out with the bathwater. This could very well be the case here...but is it? Dan Ives, arguably the most widely know AI bull says that the decline in software sector is the biggest disconnect he has seen in his career. According to Ives, switching costs, embedded workflows, and long‑term contracts make it impossible for AI agents to displace major platforms overnight. I asked co-pilot to analyze the situation and it agreed with Ives' assessment but also stated that there will likely be causalities in the simpler, basic level services.  It also recognized that Ives is a noted permabull and to take his views with a grain of salt. My first instinct was to agree with Ives' take because the software sell-off was so widespread and knee-jerky. That doesn't mean we can't see further downside however. Tech has been the market leader for so long which means there was no doubt a notable amount of momo/trend following money on board. These group of "investors" are weak handed and will get flushed out in situations like this. Has selling from this group ran its course yet is the question.  

I'm going to take a look at the chart of the S&P 500 and the VIX and analyze it from a "waking up from a 5 year coma" point of view which means, no knowledge and hence no biases from recent events....just looking at things from a purely objective technical point of view. 

My coma take of the S&P 500 chart is that it looks top heavy threatening to break below 6800. The market has failed to make higher highs recently. A healthy uptrend would have seen  a higher low on that early Feb pullback  but instead the low was made at about the same 6800ish level in mid-Jan and now we are threatening 6800 again. The more times you test a certain level, the less likely it is to hold.  Meanwhile the VIX  is in a nascent uptrend, making higher lows and looks poised to break out to 25 at least  So, the bearish  message I get from both charts corroborates each other suggesting we are on the cusp of at least a 4% pullback from the recent market peak. This is my unbiased view of these charts. Some may disagree I'm sure, but that's how I see it. If I'm right, then we need to brace for some more downside. 

Now let's bring back the narratives. If we indeed have a throw the baby with the bathwater situation here with the software sector\ a flush below 6800 makes it likely to be the final stages of the pullback/correction rather than the start of something worse. Let's see how this plays out....  

What's up with Gold and crypto?

The day after my previous post the market had a 2% drop due to the escalation I had pointed out, but then Trump walked back his Greenland threats by announcing there was a "framework" in place between the US and Europe to have joint co-operation in Greenland to allow for increased military presence and perhaps other things like resource extraction.  As the result, the market recouped all the losses in short time.

We've seen a parabolic run and now sharp correction in Gold and its more speculative sibling Silver. I've been meaning to discuss Gold for while. This run in Gold has been underpinned by 3 forces. The first one started 4 years ago after the US weaponized the US dollar by freezing  Russian US dollar reserves. As a response to this weaponizing, central banks around the world ramped up their Gold reserve purchases. The next force has been the decline in the US dollar which is arguably mainly due to concerns about excessive deficit spending. The 3rd driving force has been Trump's obnoxious actions which as created, to use one of his favorite words, "tremendous" uncertainty and disdain of the US from foreigners. Gold took a dive Friday shortly after it was revealed that Kevin Warsh was chosen by Trump to be the new Fed Head. Since Warsh is considered a monetary "hawk" by Wallsttreet, that would imply less chance of rate cuts which supposedly is supportive for the US dollar and hence weakens the 2nd driving force that has been driving gold higher. This is quite a weak excuse for a correction. First of all, this idea that the level of the interest rate is a primary driver  of a currency's value is simply false. Most of the weakest preforming currencies over the past several years have the highest interest rates.  Secondly, Warsh has indicated he is actually receptive to the idea of lowering interest recently because of lower inflation pressures, but since he has this reputation of being hawk, people seem to be more focused on that. It doesn't take much of an excuse to trigger a correction when something has been running red hot like Gold has...I just have serious doubts that the trigger - the nomination of Warsh -  is going to end up being the reason that the gold bull market or bubble has ended. By the way, why isn't anyone calling this Gold run a bubble?  The parabolic nature of its rise suggest it is one. Regardless, I have my doubts this Warsh sell-off is going to end up marking the end of this gold run just yet unless we see other things happen in the near future that truly weaken 1 or more of the 3 mentioned driving forces of Gold.  

Now onto crypto. I'll be quick to admit that I severely underestimated the length and heights of the BTC run. I have been on record to state that BTC and all other crypto are simply being underpinned by greater fool buying. BTC, having been the OG of crypto has been able to recruit the greatest amount of greater fools, far more that I thought possible. What is BTC actually useful for aside for criminal activity? Fuck all.  I'm sure someone can create a crypto coin superior to BTC when it comes to things like  power consumption, costs, scalability, ect. just how how the first computer or any other tech product was never the best one.   But even creating a better version of BTC doesn't make it worth anything  unless you can convince the masses that it does just like BTC did when if first came out, just like the meme stocks did in 2021.  It's essentially the same as a religious belief.   Ultimately though reality prevails.  In the case of BTC, it had the same reasons to go parabolic just like Gold did but it didn't. Why? It's probably because it may have finally ran out of greater fools whereas with Gold, it did not attract the greater fool crowd until just recently. Gold was actually money, not just in ancient times, but in recent times going back to 1970s when the US dollar was backed/convertible to gold.  So, if there's going to a be true crisis in confidence in paper money, i..e the US dollar,  Gold  is likely to be the winner, because it's been used as a currency before and the reason for that was because it has a tangible aspect to it that everyone around the world recognizes and uses. Gold would not be the only winner, other commodities, and tangle assets like land, real estate, food would appreciate notably. You could argue that in really dire economic collapse scenario it would be only the essential commodities that hold value the best. How much do you think your BTC would be worth in that scenario? Less than nothing.   

Anyhow, I could once again be under-estimating the persistence and pool of the greater fool buyers of BTC and this ends up being just another temporary downturn but I gotta tell you ,the action in BTC is not a good look here given what should be a bullish environment for it.  There's no shortage of buy the dip crypto bros on twitter. but you need NEW greater fools to keep the party going longer term not just circle jerking. We'll see what happens...

Escalation

The Maduro capture turned out to be a non-event as far as market impact goes. My parents used to own a condo in Venezuela back in 90s in Margarita Island to which I have fond memories of. My initial reaction to Maduro's capture was one of positivity as this tyrant has clearly caused tremendous misery for its people. Although I knew the US didn't do this out of the kindness of their heart, I figured it was a good thing to see this guy go. But then I learned that the VP and its military/militia/police  who are loyal to her are left in charge continuing with the same oppressive regime while the US doesn't support the truly elected opposition leader. Given the ease to which the US was able to secure Maduro, I would not be surprised to learn that the VP had a hand in it with the understanding that she would be allowed to become in charge. Sadly, without a full scale change of the loyalty of the military/police away from dictatorship and towards a democratically elected government, Venezuelans will continue to live in misery. The level of corruption woven into the fabric of Venezuela's political and economic system may be too great to undo as is the case with similar basket case,  authoritarian regimes. You know I'm not a doomer, but I gotta tell it like I see it. Let's hope I'm proven wrong. 

I am all for the use of force by a foreign country to remove an oppressive dictator but it has to be done right. First of all, the argument of "don't meddle and just let the people overthrow the government" doesn't hold water in many cases because the people are often powerless and are effectively prisoners in situations where the military/police are loyal to the oppressive government.  And when in comes to authoritarian leaders, you have to fight force with force. Diplomacy does not work. If however, an oppressive government is removed by force,  there needs to be proper plan in place to ensure a successful democratic transition and that's clearly not easy.  It would require the use of the foreign country's resources including their own military and people for several years  It is also difficult to uproot enough of the corruption and those who are still loyal to the oppressive government who are lurking in the shadows just waiting for their moment to usurp.. It doesn't seem the US is not interested in making the type of  commitments needed to ensure Venezuela becomes a free and democratic country. As we all know, the US failed in their attempts to reform Iraq, Libya, and Afghanistan when they ousted their dictators 

Now there's talks again about Trump wanting Greenland. Throw Iran tensions in the mix and it would seem likely that Trump is not done meddling around. He  appears to be serious about acquiring/occupying Greenland. Treasury Secretary Scott Bessent recently said Trump will not back down from acquiring Greenland, arguing Europe is too weak to ensure its own security. This reminds me of the tariff situation last year at this time. We all knew Trump wanted to implement significant tariffs but most of us thought this was largely a bluff and that he would settle for a lot less. Although that eventually ended up being the case, it sure wasn't initially when the "liberation day" plan was unveiled.  It would appear that this rising geopolitical tension is going to eventually hit the stock market given the market has a running of fumes feel to it.  As I've stated before, the longer we go without a sizeable 3-5% pullback, the greater the chance a larger 10% type pullback ends up occurring at this point. I can see that the futures are down 1% as the market is closed today. The recent comments from Trump and Bessent are giving me a clear sense of escalation and it looks like the markets may be feeling it too....we'll soon see.   

 

Quick follow up

The following chart pretty much captures why I have mixed feelings about 2026. It shows US financial conditions.  This indicator should be used as a contrarian indicator. As you can see, when conditions are very accommodative, i.e. above 1 for at least a few months, the markets were close to making a significant peak and conversely, when conditions were tight, i.e. below -1, the market was close to making a significant low. 

This is not a perfect indicator (no single indicator is).  It will not give advance warning to declines as a result of exogenous shocks like COVID and "Liberation day" because these are negative events that essentially came out of nowhere. It should also be noted that in 2014 when this indicator flashed red, the market still had a good year returning 14% with the largest correction being 8.5% . Then, in 2015 the SPX had a flat year with the largest correction being 12.5%. So, it would have been best to have ignored the warning in 2014. Currently, we are just below the 1 level after having touched it very briefly in October. This suggests the market is much closer to a top than a bottom but also that there's still room for the market to go higher  before reaching redline territory, although that shouldn't be taken as a given. This pretty much sums up my feelings of the market based upon my observations of several intermediate term sentiment indicators which is this: there is still room to run but we would be redlining should that happen without a correction of at least 5-10%. which would  then set us up for a even larger decline. 

News flash: The US has captured Maduro and made military strikes in Venezuela. Let's see how markets respond on Monday. 

Outlook 2026: I have mixed feelings

Since last post the market had a moderate dip, rebounded back to the highs and for the past 5 days has been dripping  lower. This is the time of the year when I look back and look ahead. It's been yet another  crazy year. If you told me that the SPX would finish up 17% in 2025 after the liberation day meltdown I would have said you must be smoking the really good stuff. Even the most bullish of  bulls must have been surprised by this. We came into 2025 with complacent conditions as I had pointed out at the time and it made me cautious.  But the liberation day meltdown created the sentiment reset that paved the way forward to allow for the market to recover and soar to new highs the way it did. We went from Trump euphoria to Trump deep pessimism by mid April 2025. Sentiment has now however shifted back towards complacency...not euphoria, but complacency. Let's examine why. 

Wallstreet's average SPX year end targets for 2023 and 2024 were for gains of 5% and 2% respectively. It would  be far better to have this type of low expectation than what we have now given the average 2026 year end target of about 7600 which implies a 11% gain from here. That's not what you would call  wall of worry conditions especially coming off the back of 3 consecutive years of strong returns. Optimism is mainly centered around  rate cuts, AI adaption, and earnings growth beyond the Mag 7. Coming into 2025 we saw similar optimism from strategists with rosy year end price targets centered on bullish implications of Trump's tax cuts and de-regulation. By April the optimism towards Trump turned to deep pessimism thanks to Trump's threat of punitive tariffs and year end price targes were aggressively slashed. The lower expectations provided the necessary rebuilding of the wall of worry for the bull market to resume. It would appear that we need to see a similar rebuilding of the wall of the worry at some point in 2026 which implies a significant correction would be required. In 2025 it required a 20% decline to rebuild the wall.  That doesn't necessarily mean another 20% drop is required again this time.... it would be quite rare to see 2 consecutive years of 20% drop..., but if we don't get much of a correction in the coming months and the market instead just simply keeps going higher we would then see the market go from complacency to euphoria setting us up for an even bigger decline. Aside from rosy price targets, here's other evidence showing we have a complacent/overheated market.

Despite the bearish implications of the above charts which warrant at least a 5-10% correction, we have not yet seen the euphoric conditions that mark a major bull market peak . One classic sign of that would be a flood of IPO activity centered on AI. It seems unlikely that the so called bubble in AI is going to imminently burst without major flood of IPO activity which has not occurred as of yet.  Open AI is slated to IPO in 2nd half of 2026 at the earliest and so I'm looking at that event as to when the AI peak would be immanent. Obviously, there's no guarantee of that. Here's some other charts which suggest the bull market, albeit overextended, still has legs.

Bottom line for me is that current market conditions are not favorable in the short to intermediate term. Sure, markets can keep marching higher from here and possibly enter a blow-off phase which would be lucrative to capture , but when there's no wall of worry to climb it becomes a question of when, not if, the market hits a major air pocket and gives back all the gains and then some. It would appear to me that the market is in need of a reset.  Despite my concerns, it would appear that longer term the market still has a ways to go before hitting a secular peak. Just look at that last chart I posted which is consumer confidence. It would be inconceivable to see a secular bull market peak with confidence near record lows, benign IPO activity., and more favorable monetary conditions forthcoming. Let's see how it goes...

Bubble talk and warning shots

I've been noticing a lot of handwringing again on twitter and elsewhere about how the market is overvalued, about how there is an AI bubble. A few days ago we had CEOs from MS, Goldman and JPM echo such warnings.  The reflexive contrarian response to this would be that this is evidence of a wall of worry for the market to climb higher still. Well, it's not always that simple. It could be that these worries are justified but early. Despite the bullish contrarian implication of the cautious narratives out there, there are pockets of excessive bullish positioning as well as poor market breadth which suggests the market may indeed be vulnerable to a correction and perhaps a sizeable one, but as mentioned, with all the hand wringing out there, perhaps the correction happens a litter later on as a watched pot doesn't boil so to speak.  Let's go over the evidence. 

I've mentioned how AAII sentiment has not been showing excessive bullishness in the weekly surveys but this contradicts how they are actually positioning themselves. According to the monthly allocation survey, AAII investors now have 70.5% allocated to equities. Anything above 70% is considered "excessive" territory. Now, a single month reading above 70% is not an automatic bull killer by any means; it may only suggest a correction is forthcoming as  was the case in the summer of 2024 which was the last time equity exposure hit 70%+ which first occurred  end of May, remaining at 70+ until end of July. Then, in early August the market had a sharp  correction due to a growth scare and the unwind of the Japanese carry trade. Prior to 2024, AAII equity exposure hit 70%+ at the end of March of 2021 and stayed above 70% for the remainder of the year....we all know what happened starting in 2022. Prior to 2022, equity allocation hit 70%+ for 3 straight months starting at the end of December in 2017 leading up to the 10% correction in late Feb 2018.  So, based on history, hitting 70%+ for the first time is indicative of late stage rally behavior precluding at least a significant correction  but it also suggests that the market may still have a bit more more time and room to go higher first before the major downside happens! If we go by history on this indicator alone, it suggests the likelihood of a  significant, 10%+ correction would be 2-3 months from now. Of course, you should not hang your hat on any single indicator, so let's look at some others. 

Sentimentrader posted a chart on twitter titled  "Titanic Syndrome and Hinderburg Omen"  which captures the weakness we've been seeing in the internals. As you can see, this had preceded some  nasty corrections.

Investor's Intelligence bull/ratio is a lobsided 4:1 which is quite excessive. This is in stark contrast to AAII bull/bear ratio which is neutral. It's quite odd how these 2 surveys are diverging so much like this...which one do you believe more? 

Despite the above mentioned warning signs, there are still plenty of good reasons to believe that despite what appears to be a forthcoming correction, it wouldn't signal the end of the bull market because longer-term sentiment isn't excessively bullish enough. I've mentioned the BofA bull/bear indicator many times already, so here's another 2 charts which gives the same message

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You can see that positioning is bullish not stretched and if we did see a significant correction, it would probably reset positioning to  bearish quickly. 

Let's talk about this "AI is in a bubble narrative" again. The fact that you are hearing this everywhere to me indicates that it's either not a bubble or if it is, this call is early. As I said earlier, this doesn't mean that there's no froth out there or strong warning signs of at least a correction....there is....but to me it says that if we get one, no matter how bad it looks, somehow, someway it will not be the end of the bull market because we've haven't seen the narratives which embrace an optimistic outlook,  which embraces AI fully - not half ass like now where it's pretty much a 50-50 split of optimists and pessimists.  We've also have not seen a flurry of AI IPOs including the big kahuna Open AI which apparently won't happen until second half of 2026 at the earliest. Again, I'm not saying there's no signs of overheating in AI or the markets in general, but we are far from the euphoria of the dot com bubble. Back then, the giddiness was palpable and you could hardly find anyone who was bearish. 

For a major top you need the market to be fully embraced

So, I left off by saying wake me up when September ends...well I'm awake now! I was ST cautious, LT bullish when I last posted. My ST caution call did not pan out, but hear me out. First of all, when it comes to the ST, conditions can change very quickly which they did and I'm not necessarily going to make a post when that happens as I typically don't post very often.  Also, making ST calls is often a crap shoot anyways as randomness plays a big factor. I've always stated that and I've always said to place your focus on longer term conditions.  Not making excuses, just tell it as it is.  When the market had just the slightest of dips in mid August, many of the ST indicators got reset as folks ran for cover which placed the market back into a favorable ST condition. For instance AAII sentiment showed more bears than bulls in early  August and it stayed that way until mid Sept even as the market rallied. Such stubborn negative sentiment almost always means any dips will be shallow or non-existent. In the last 3 weeks the bull/bear ratio has risen to 1:1 which is only a grudged shift in bullishness.  It's highly unlikely the market will be close to a major top until you see a custer of readings where bulls outnumber bears by at least 1.5:1.  Another group of folks that continue to be reluctant to embrace the market continues to be hedge funds. The 2 hedge fund positioning components of the BofA bull bear indicator continue to show we are nowhere close to seeing exuberance. Benign readings like this simply don't happen near major tops.   

Yes, of course corrections can still happen when sentiment is not in an "all in" bullish condition but more often than not, it doesn't pay to get paralyzed by the ST and not make a move on a long trade you are considering assuming you have a longer term horizon (at least 1 year) and won't shit the bed if you do get caught in a correction.  But you do you. 

I see a lot of angst on fintwit about high valuations. Yup, they are high but that's not necessarily actionable. Why are valuations high and can it be sustained is what you should be asking. High valuations in the market are attributed to the MAG 7. With the exception of Tesla these are monopolistic-like type companies that have been able to sustain high margins and significant free cashflow and now with a benign interest rate environment, it further underpins the valuation of these cashflows. Yes, the fundamentals of these companies can change but until they do the "high valuation" argument will not hold water until there is an almost universal embracing of these companies which  would then make them vulnerable to just the slightest of missteps or some negative macro issue. Of course you will find plenty of people bullish and long the Mag 7. but is there room for even more bullishness? I believe so yes. Again, just look at hedge fund positioning. 

I want to take a step back for a moment. We've been in a secular bull market since 2009. Since then we've had 5 major corrections/mini-bear markets of 20%+.  Just prior to all of these corrections you had  complacent conditions (except for perhaps the 2011 decline) from multiple sentiment indicators and anecdotally via the popular narrative at the time.  The corrections that ensued ended up resetting sentiment back to skepticism/pessimism  which has been the default condition since the GFC. This resetting of sentiment allowed the secular bull market to resume. It didn't matter what the cause of the correction was or what the fundamentals or politics  were...so long as we got the sentiment reset, the bull market was able to resume and hit new heights until we got to the condition again where sentiment became complacent/chronically bullish. Coming into the year I was bearish because of the complacent sentiment condition of the market which was underpinned by the election of Trump. Ironically, it was because of Trump that we ended up getting a 20% decline instead, because of  "Liberation Day". This resulted in the opposite condition where sentiment became quite negative because of Trump.  Could it have gotten even more negative with the market tanking even more than 20% if certain things had happened? Of course, but once you get this type of negative sentiment condition, it becomes a question of when, not if, the market will hit bottom and the bull market will resume. This has been how things have played out since 2009. If you just simply ignored whatever the "fundamentals" are put all your faith in monitoring what other people are doing/feeling and went against them at the extremes you would do quite well. Of course, it's difficult to do this as emotions can get in the way and there's an art to doing this for there is no way to know for sure just how extreme an extreme can get!

Even when we hit those major tops which led to a 20%+ declines, we never got to the point where there was widespread optimism from not just investors but folks in general. I'm talking about the late 90's type optimism. I'm thinking that at the ultimate, secular bull market top, we will see this type of optimism....seems like that's impossible to ever happen given all the angst and division that is out there. 

Wake me up when September ends

 It's been a while. I've had a busy summer including going away for a trip to Eastern Europe. What a difference in scene. Such beautiful architecture and a cool vibe. I visited Berlin, Prague, Vienna and Budapest. One thing I've noticed with all is how you don't see many overweight people unlike here in North America whereby about 50% of people are overweight from my anecdotical perspective. I also learned about the sad history of this region, in particular, WW2 and its aftermath.  I digress.

So, since my last post the market took only a modest breather and simply grinded on as is the hallmark of a bull market. It turned out that tariffs weren’t as bad as expected as rates which were applied were either less than feared, more selective or delayed. As a result, markets climbed the proverbial wall of worry. Although there’s been a sense of relief, there’s still angst towards Trump and tariffs. This suggests the wall of worry is in tact which is good news for bulls longer term. Shorter term, there are signs the market is overheated. I meant to make this post just prior to when the market had a notable dip on Friday as the first 2 charts are dated 1-2 weeks ago.  What the indicators are telling me is that there's evidence to be cautious ST  but that there's still plenty in the tank for the bull market more longer term. Experience has taught me that in such a situation, it is best to pay more attention to the latter and not get handcuffed by the former as any downside would likely be limited. You know I hate chasing the market and I still do but under current conditions, if you did and the market went south,  you would very likely get bailed out without suffering too much pain so long as you are patient. Lots of investors and probably most ST trader types can't do that however.  

Here are charts that show how the market is ST overheated (note they were as of late July)

Others things to note: fear/greed index hit extreme greed territory about a month ago and lingered around there for a couple weeks. This is not necessarily fatal for a bull run, but indicative of ST overheating. Other things to note are pockets of froth in the crypto and penny stock space. This would also suggest caution in the near term, but the euphoria/recklessness is not broad-based enough to warrant a more serious concern.

Now for some charts which show that we haven't hit the sort of extremes which happen prior to major corrections or bear markets: 

This chart measures Risk Appetite. It has been on the rise but not yet at LT extremes that have marked major corrections/bear markets.  

Next is the BofA bull/bear indictor. Again, elevated but not at extremes. More importantly, if you look at the positioning components of this indicator, i.e hedge funds and LO funds, they are still depressed and what you typically see just starting to come out of a major market low! In fact, these positioning components have been depressed like this the entire run up since April. Positioning matters far more than technical indicators do as per the motto of this blog.  You may recall in a prior post where I mentioned that leading up to the 2021 peak there were a cluster of extreme bullish  positioning readings by hedge funds. Hedge fun positioning in recent months suggests we have a looong way to go before getting worried about the next bear market. 

So, bottom line is that there's good reason for ST caution but the bull market is likely to remain intact after any correction...a similar message I had in early May, however, I'm thinking that this time a corrective phase will be more severe and/or prolonged as there are more ST excesses this time. We are entering what is typically an unfavorable seasonal period. I'm not a big fan of seasonality but it certainty won't be doing the bulls any favors when you have ST conditions like this. 

Notice that I haven't made any mentions of the narratives du jour. If you take a look back and just focused on the indicators and market action while paying no attention to narratives or personal biases, just imagine how much better you would preform. I include myself when I say "you".  When I refer to "market action", I'm not referring to whether the market is going up or down but the way it is going up or down. For example, bull markets tend to behave in a certain way:  small but relentless advances, punctuated by sharp but short lived corrections. Sometimes the correction phase in a bull market can last for a few months like what we saw in the summer of 2023.  

But of course, I can't help to indulge in the narratives. Last Friday jobs numbers were weak and the prior 2 months were revised sharply lower which caused Mr. Orange to fire the BLS commissioner. Lol. Can't say I'm surprised. Now there's high expectations of a rate cut in September. Trump is also set to name Powel's successor who will very likely be another one of his yes men. So, it's quite possible that the market starts to get concerned over slowing growth over the next few months, but offsetting this is the greater possibility of rate cuts. Rate cuts in a slowing, but still growing economy is bullish, while rate cuts in an economy heading towards recession is not. We shall see how the narratives play our, but as I stated, defer to the indicators. If I had to guess, we will see the market trend down/flat until the end of September.....wake me up then. 

Reflection

This is mostly going to be a personal post, but first some market comments. Since my last post, there was only a slight pullback before major news was announced which was that Bessent was able to negotiate a "trade deal" with China. It's really just a temporary de-escalation for 90 days such that Chinese tariffs will be reduced to 30%. This was enough relief to result in the market to pop 3% the following day and we've added to those gains a bit more. On Friday night, Moodys downgraded US debt a notch to Aa1. They are the 3rd agency to do so since 2011. I won't get into this for now except for saying this, which I have said before...These rating agencies all had AAA ratings on subprime MBS just prior to the the GFC and since they were made to look like fools, they became tough guys to try and salvage their reputation.  So far, the market reaction has been ho-hum. In General, the market is even more so in an ST overbought condition, but the sentiment reset I pointed out a few weeks back is still firmly in place. That along with how the market has been relentlessly rising strongly suggests this is a bull market rally, not a bear market rally. however, I do suspect that 3% "Bessent gap" will get filled at some point this year. I wouldn't be chasing the market here.

I recently turned 48 and I've been reflecting on my life and certain things that have been happening recently. I must say that I am blessed. Lucky and blessed....perhaps they mean the same thing. I know I mentioned the following before. There have been multiple times in my life where I was severely off track both from a personal and financial perspective. There were several years in which I felt I was in a huge hole...holes that I put myself into for the most part for one reason or another such as being timid and shy, being too laid back without having any goals or a sense of urgency and lastly overconfidence which led to recklessness. Thanks to some luck and lots of resiliency I managed to get back on track for life.  Through the dark times I never had a "woe is me" attitude, I never embraced negative narratives,  I kept it together, I fought. What else can you do but fight is the attitude I always had when faced with a defeat or setback. I would never mope and feel sorry for myself. I never resorted to alcohol or drugs to cope, nor did I ever consider doing so. Instead,  I would do intense cardio. That was my drug. 

At 48 I have a family, a house that's paid off, a great job with significant prospects for growth and I'm in great health. My greatest achievement is my daughter who is beautiful on the inside and out. She is so precious to me which makes me feel so vulnerable. I would kill or be killed for her.  Now and then I can't help but feel a wave of anxiety. What if something happens that takes away any part of this good situation I find myself in? Part of this is imposter syndrome as a result of all the setbacks I experienced and part of this is due to recent bad things that have happened to clients, friends and family. In the past 2 years, numerous people I know have either unexpectedly died or fell seriously ill. I'm a logical person, a positive person, but I can't help but get a bit rattled by this, thinking what if I or someone in my immediate family are next? I have this one client, a sweet Italian lady who recently lost her adult child to cancer. He was my age. This is now the 3rd child this lady has lost in last 10 years. Yes, 3rd child. What do you say to someone in this situation? It's beyond horrible, beyond devastating. You want to talk about having bad luck? Woe is me? Fuck your bad luck. This is what bad luck really looks like. Me on the other hand, I feel almost guilty for the amount of good luck I've had over the years. 13 years ago my mom almost died of a brain aneurysm. She was only 56. There is a 50% chance of survival and if you survive, only a 34% chance that you won't have some sort of permanent brain damage. Therefore,  you have only a 17% chance of surviving a brain aneurysm without brain damage. My mom beat the odds. Aside from her not be able to recall a few minor memories in her past, she is totally in tact. How lucky was she? How lucky was I and my family? That experience really put things into perspective and made me realize the importance of not worrying about the small stuff, of appreciating the things that are really important to you, knowing that it can be taken away in an instant without warning. Recent events have reinforced this. I don't think I'm as resilient as I once was because things have been going so well and it's made me kind of soft. Also, I feel like I have more to lose now.  In 2022 when markets were rough, I had some sleepless nights. Even though my clients held up relatively well and weren't in a panic, I couldn't help feeling vulnerable. I couldn't help feeling that the career I had been building for the prior 5 years was going to fall apart and crumble through my fingers putting me back to square 1 like so many other times and unlike in the past when I've had major career setbacks, I don't have the time to recover anymore. Being young was something I knew I had in my back pocket when things weren't going well. "I got time to turn it around" was something I would say to myself. I don't have nearly as much time now if I fuck things up or if things go majorly south for some reason. Don't fuck it up. I something I tell myself repeatedly.  Obviously, I can't control the markets and must accept that bad shit, i.e. big drawdowns, are going to happen. I just have to ensure the smoothest ride for my clients given the risk they are willing to take, making tactical moves when warranted and be proactive by calling clients during bad markets to hold their hand through it. I did do this in 2020, 2022 and just recently. Lucky for me (yet again) my clients are easy to manage as for the most part they are financially secure, always take my advice and don't have a propensity to want to panic during bad markets.  I'm the one who is supposed to have the cool head during bad markets but it's hard not to get rattled to at least some small degree. Having my emotions "hostage" to the markets to some degree is the worst part of my job. This is a big reason why I do this blog as it serves as an emotional release as well as a way to express the logical part of my brain. Overall, I love my job which I know must be quite enviable. I'm making good money with lots of growth prospects, I get to work wherever I want, whenever I want and with whomever I want. In January I fired a client for the fist time as he is a moody prick who always finds something to complain about.  He was a large client too. I didn't give a fuck, because one thing I don't tolerate is having a relationship with a toxic or negative person.  I think this guy actually has bipolar disorder....not my problem anymore.  

Now I'm going to discuss some things that I'm wrestling with. Although I'm 48 I certainty do not look or feel it. Most people who meet for the first time think I'm in my early 30s and that's how I think and feel too. I keep myself in good shape. I can still keep up with guys far younger than me when I play soccer. I have cheated father time to some degree but the problem I'm going to have to face is that at some point father time will catch up to me.  Will I be able to make the transition from a young man to old man? It's really hard for me to accept that. There is this guy by the name of Bryan Johnson, also 48 this year,  who made millions as a tech entrepreneur. In recent years he has dedicated his life to taking extreme measures to ensure he lives as long as possible because he feels that within his lifetime, it's likely we will have the ability to become immortal as we find a breakthrough to slow down or stop the aging of cells and/or merge with machines. And so according to Bryan, it's absolutely critical to do whatever you can to don't die so that you make it this point of "longevity escape velocity" as he calls it.  Even before I knew of Bryan Johnson I often pondered the possibility that given the rapid pace of technological advancements, we may find a way to live forever. Can you imagine if that were to happen? I'm not holding my breath for that but I don't think this is a pipedream.  

For anyone reading this. if things haven't gone your way, my message to you is to continue to fight no matter what.  This doesn't apply to achieving things that are ridiculously unrealistic but for everything else, you have to keep fighting until the bitter end, no matter how many times you've failed. No matter what. Don't be negative even when things appear grim. Being negative does you no fucking good. Not one fucking thing. It will only harm you, holding you back while making you a miserable fuck. I've mentioned about how luck was a big part of my success, but I will say this....I would not have been in a position to get some of the luck I experienced if I was a negative, miserable fuck when I was down and out. If you're in a shitty spot, do whatever you can that's in your control to make your situation better, even with the smallest little things.  Fight right until the bitter end and if it still didn't work out at least you know you give it your all and not have to look back thinking I could have done this,  I should have done that. That would be an agonizing existence. I already feel some of that agony when I look back at things I should of done or said. It still hurts. But I try not to dwell on the past for too long. You can't go back you can only go forward. Just don't realize this when it's far too late. 

Strong rebound....so far so good but ST overbought now

My previous post pretty much pinpointed the exact point when the market staged a massive rebound. Basically, Trump is showing his willingness to water down his tariff threats. For example, he provided  carve outs for semi-conductors and electronics and he exempted auto tariffs for Canada and Mexico so long as they comply with the USMCA. He was privately approached by the CEOs of Walmart and Target who warned him of empty shelves and rising prices in the months ahead if he follows through with this threats. No doubt other big CEOs have gotten into this ear. Therefore, there's probably some hope or expectation that any tariffs imposed will be more gently administered to allow for companies to adjust. 

The market has now recovered all the losses post liberation day which is quite impressive. In my previous post I said to look at market action to determine whether a rally appears to be bear market rally or the start of a new bull phase. So far, it appears to the latter due to the relentless nature of it. Meanwhile positioning/sentiment is overall still firmly skeptical. AAII sentiment in particular has exhibited a persistent amount of high bearishness that is only comparable to the depths of bear market lows. Many correctly point out to see what these folks are actually doing with the money vs what they are feeling. They have indeed been pulling back their equity exposure, which is currently at 64%. This is not the same degree as the GFC but it comparable to the 2022 bear market.  Near the market peak, at end of December, equity exposure was 70%, likewise,  it was 70.5% end of December 2021 which was also the market peak. By end of October 2022 exposure declined to 61%. The currently allocation of 64% is obviously close to 61% but not there yet, but it could get there even if the market continues to rise or just holds as these folks may be inclined to sell into strength. Given the persistent high level of bearish sentiment, it would appear that selling into strength would be a strong possibility.

I have a friend who approves online trades for TD customers. He told me that during the liberation day meltdown he said the rush into money market funds was the most he had ever seen. Barrons conducted a survey of  money managers at end of March/early April which showed bearishness at at 30 year high... this was prior to the liberation day meltdown!  

BofA bull market indicator has had a notable reset

This indicator has been whacky as of late, not being in sync with other indicators. Keep in mind this is a global sentiment, not the US although these markets are usually highly correlated. Note the very low positioning of hedge funds. Hedge funds in particular, have been big sellers during this latest rout. 

The latest surge in the market has rendered it ST overbought, but that what you typically see when you get a bullish thrust from a correction or bear market bottom. A rare Zweig Breadth Thrust was triggered recently, which has strong bullish implications for the next 6 and 12 months. In fact, it has a perfect record for these times frames. 

I've seen some people on twitter debating whether this signal was actually triggered, but I saw a similar study from sentimentrader which gave the same message and so I am going to conclude the signal is valid. Of course, there's not guarantee that any signal is going to work this time and it does not preclude the possibility of significant weakness in the short term. 

I can certainly understand how one can be quite skeptical of any bullish signals.  After all, it appears almost certain that there's going to be significant economic weakness for the next  quarter or 2 given the collapse in container shipments and reigning in of capital spending as a result of the tariff turmoil. But this is widely known information isn't it? So, is the market in denial or could it be already looking across the valley to a more sanguine environment? Here's how the latter could transpire: Trump makes  "deals" or at least provides a framework which suggests tariffs aren't as bad a initially feared. Another possibility is that imposed tariffs either get bypassed or uncollected to a significant degree. The proper collection of tariffs is something that is not getting any attention. How are understaffed customs agents going to properly enforce the enormous amount of tariffed goods, many of which could have complicated tariff rates/rules applied to them?  Ultimately, the bullish resolution could be that somehow, some way the tariff threats turn out less than feared. It obviously takes a leap of faith to believe in such a narrative and the path to this narrative could very well have twists and turns, but here's the thing....if you wait for things to turn rosey again before deciding to buy you will probably end up doing so at all time highs. I said the same thing a few times from late 2022 to early 2023. You have to pay up for certainty. Back then the fear was that rate hikes were surely going to cause a recession. Now, the narrative is that tariffs are surely going to cause a recession. Then, just like now, it was difficult to go against this negative view. 

As always, I will defer to the indicators and market action and right now despite a ST overbought condition which is likely to result in some market weakness, it suggests to expect an optimistic resolution to all this turmoil somehow, someway at some point. It certainty doesn't feel that way (I certainty have strong doubts) but it rarely feels that way when there's a crisis of some sort. It requires a leap of faith.  I see lots of calls for a re-rest of the lows. While I expect there to be some ST weakness, I don't think we'll see a retest if the bull case ends up playing out....we'll just have to wait and see what happens. 

Much needed sentiment reset but not out of the woods

Coming into this year I was not bullish on the market for 2025 as I had noticed several red flags. In a nutshell, there was too much bullishness, too much complacency. The orange swan event of recent weeks has washed away and reversed such conditions creating a reset in sentiment. There's now plenty of evidence showing that the market may have either hit a bottom or in the process of forming one given the major retreat in positioning and expectations.  Here's some charts which show you what I mean:

Coming into this year, the consensus view was rosy for the markets with the average price target implying a 10% gain for the year. Now, the median price target has dropped to about 6000 on the SPX  as many firms have been scrambling to cut their targets and the consensus call now is that we are going to have a recession. There's obviously good reason for this sudden about face and pessimistic outlook, but I would be a lot more concerned if most stategits and fund managers remained hopeful and didn't capitulate. This reset in sentiment is much needed if the bull market is to eventfully resume. 

I like to use my "waking up from a 5 year coma" example in an attempt to view the market objectively, without being emotionally influenced by current narrates as you wouldn't know what they are. So, if you just woke up from a 5 year coma and I showed you the above charts along with an overlay of the chart of the the SPX, you would have to objectively conclude that the market would appear to be in a strong buy zone if you had a long term horizon. You would have to conclude that this decline looks like a severe correction/short lived bear market. History shows that if you put your faith in the indicators when they show extreme risk aversion and starting buying, you will get well rewarded...perhaps not immediately and perhaps with the market going down further in the days, weeks or even months ahead,  but in 9-12 months. Of course, it's difficult to have faith things are going to work out when you are aware of the narratives which are bleak and if you're watching the market every day, tick by tick while being blasted by news headlines like so many people do. Eventually, emotions and impatience gets the better of folks and they shit the bed.

Near the depths of the 2020 crash, the 2022 lows and now, I had this hopeless feeling that we were going to be fucked.  Maybe this time we will actually be fucked by this orange clown who is wrecking havoc, or perhaps things will somehow, someway not end up as bad as feared. Here's the thing...whenever you have a crisis, whenever moods sour so suddenly like they have now, it can create strong reactions/responses to mitigate or undue the very source of the crisis. I'm sure you've heard of the notion that if you put a frog in a pot of water and slowly increase the temperature, it would remain there and eventually get cooked without realizing it, but if you put a frog in a pot of boiling water it would jump out immediately.  The fact that we have seen an immediate and severe adverse reaction to Trump's tariff plans, has businesses already scrambling to make adjustments and/or plead with Trump to change course. It's also sounding alarm bells within the Republican Party and the courts to take action against Trump. But swift action needs to be taken now and damage is already done. Business confidence is shaken as plans are being put on hold and I'm sure economic activity has slowed as US imports from China have falling off a cliff. There's also going to be significant drop in tourism from foreigners and there's been dumping of US dollars and bonds. What a mess. On Easter Sunday Trump posted a hateful Easter rant about Democrats and Joe Biden on his Truth Social platform. What a piece of orange shit. And we have 4 years of this asshole. He's also been critical of Powell indicating his willingness to fire him. All of this just leaves a bad taste in people's mouths at a time when there is so much market uncertainty and fragility. 

Bottom line here is that we are seeing extremes that in the vicinity of where prior major corrections lows were made, but the scenario we face today has such ominous implications to take the market to significant new lows unless we see a major back peddling by Trump. Trump looks at the markets as a sign of approval and right now the market is sending the message loud and clear.  You always have to keep in mind that the market will price in all widely known information. There has obviously been a significant downward re-pricing of expectations, bracing for a drop in expected earnings for this quarter and probably next quarter. The question now becomes has the market priced in enough? The above charts suggest a lot of negatively has indeed been priced in but you can't assume the worst is over until market action proves it. Bulls do not get the benefit of the doubt. 

History shows that in a bear market, it typically starts off as a moderate more measured decline and it's only in the final or later phase where you see the scary, waterfall type declines as this is indicative of emotional, panic selling and forced selling from margined players. Strictly by observing the waterfall type action we're seeing, it would suggest we are in the final or later phase, rather than the beginning of a bear market.  It is reminiscent of what we saw in 2020, 2018 and 2011. Positioning/sentiment also supports this notion. Going further back to the GFC we saw the major waterfall phase of the decline in October 2008 by which the low then retested twice in November and March via lower lows as market internals showed positive divergences. Of course, the GFC was a once in century type storm. Although the current crisis can have the making of being a once in a century type storm, it is largely self-inflicted and can be undone although some damage would likely remain. The leverage in the non-government system is also nowhere close to what existed in the GFC.   

Market action will give you clues as to when this shitstorm has passed. During a true recovery, aside from the initial rally near the bottom which tends to be strong, you will see the market advance with resiliency and lower volatility accompanied by skepticism of its sustainability. Until we see this type of action, you have to assume we are in the grips of a bear market and respect that. So far, it has been the US market which has been hit the hardest, with International holding up a lot better, but if the US meltdown accelerates and hits new lows, I doubt International markets would continue to be safe havens. We are also seeing gold soar. This is clearly an indication of fear and a vote of non-confidence in the US dollar. This decline in the USD and rise in government yields is admittedly alarming, but the parabolic nature of the run up in gold as of late is also indicative of where we may be in the market cycle for gold and USD. Gold had been rising steadily and quietly for several months, but now is going parabolic which is what you tend to see near a major peak.. the oppose of the waterfall action you tend to see near major lows. Parabolic rises and falls are indicative of emotions and reckless momentum trading. Of course, it's always difficult to know how long it can carry on for, but history shows that time is NOT on your side if you betting for such trends to continue without a least a major correction. Here's another indication of where we are in the sentiment cycle when it comes to the US dollar. The cover on the left was in October and the cover on the right was from last week. My how times have changed so quickly.

Bottom line: Things feel really hopeless and there are clear signs of bearish extremes which you typically see near a major low, but you have to respect the market action which is not good and we can certainly make new lows here given the economic consequences of what Trump is doing and the damage in confidence he has created. Market action will tell you when the coast is clear and right now it's a hard no.