Weekend Thoughts

The market has had a slight pullback which shouldn't really be a surprise after such a blistering rally in January. People are citing weak growth, trade tensions as the culprits but you could use any excuse you want such as Donald Trump took 2 dumps instead of 1 on Wednesday...it doesn't matter, because at some point the market was going to back off otherwise we would be on pace for a gain of 100% for the year. So, as I wrote before, a good clue to what the next major move will be is to examine expectations/sentiment. AAII bull bear ratio hit 1.7 : 1 just prior to when the market peaked on Wednesday.  I would call that reading mildly bearish for the market for the ST, however, AAII sentiment can be very fickle and it wouldn't surprise me to see AAII bulls run for cover next week if the market pulls back more or chops.

Here's a chart that really stood out to me

Despite January being one of the strongest months on record for the market, individual investors as a whole have not bought into it. That to me suggests this rally from the December low is likely the real deal or at the very least has staying power for a while longer, since this type of disbelief by mom and pop investor has always served as a great contrarian indicator. If this was a bear market rally it would more likely be the case for mom and pop investor to quickly jump back in fearing they will miss the boat. Maybe that happens later on but until it does, evidence suggests to expect a bullish resolution to whatever type of pullback or consolidation that takes place.

The bond markets continue to send a strong signal that interest rates aren't going up any time soon and that monetary policy may in fact be too tight given that US 1-5 year bonds are all pretty much right at the fed funds rate with the 10 year closing in too. You could make the case that the bond market is expecting the next move of the Fed is to cut rates. At the very least it's saying the Fed ain't hiking rates anytime soon. For a rate cut to take place it would be a complete 180 turn from just a couple months ago and I would suspect this to only happen if there was a serious concern about growth or some systematic stress. The message of the bond markets is for me, the most significant argument for the bear case in the medium to long term. 

I believe the next little while could make for good  hit and run opportunities to play the downside i.e.  establishing bearish positions into strength and holding positions for no longer than a day or 2.  Better be careful and keep an eye on the put/call ratio though...you don't want to make such bets if too many others are doing the same.