Fear is a great motivator

The market has been drifting lower since my last post and is back to the lowest point since the decline that began in early May started. I've mentioned how sentiment has been moving towards a bullish condition and it has moved even further still, however, it feels like to me that the market wants to head lower and we could very well see a whoosh down as  "support levels" get broken but with sentiment already negative as it is, such a sell-off should lead to the type of extremes you see at intermediate term lows rather the beginning of something much worse.

What's troubling the stock market? Seems to be the bearish message of the bond market is becoming too hard to ignore as inversion sets in even further along with some weaker than expected economic reports and of course, the trade drama which might be contributing to the  weaker data. It would seem these troubles are largely self inflicted. The bond market is clearly telling the Fed that it made a mistake with its last couple of rate hikes. Trump is trying to bully China like he did with Canada and Mexico but China is not caving in. It might very well have to be the case for the market to have a breakdown of significance to light a fire under the ass of government authorities to take a different course of action as it did in December and in all the other major declines since 2008. Fear is a great motivator.

Powell's bathwater must be getting really hot again. He must certainly now realize he made a mistake hiking in December. How can he not with the 2 and 5 year treasury bonds only 10 bps or so away from 2%? So when will the Fed cut rates? Are they going to wait until it's painfully obvious (and too late) or will they have the stones to do it sooner? A sharp decline in the stock market could do the trick again. Futures market is putting the odds of a rate cut by 2020 at 80%! Is this the case of the tail wagging to dog or the other way around? Powell once believed he was the dog but last December showed it was Mr. Market who was the dog!

Let me circle back to sentiment again. If we ignore the inversions, trade drama and such and just focus on the sentiment stats, it would appear that any downside we do get from here should be relatively limited because sentiment is already negative. I read an interesting report  a couple weeks back released by Bank of America which showed that global fund managers as a group ($600 billion assets) were underweight equities by one standard deviation, overweight cash and overweight bonds (7 year high weight). If you look at the history of this report on the positions of global fund managers it has served as a great medium-long term contrary indicator.

All in all, what I'm sensing is that although market action and some fundamental metrics such as the bond market inversion are sending bearish signs, if we do get a breakdown in the market it should likely set the stage for a low rather than the beginning of something nastier. Let's take it one step at a time and adjust accordingly if need be. As mentioned last post, navigating the ST is a tricky affair. The shorter the time frame the more randomness plays a factor. There can be a lot of noise which creates whipsaws especially when you have the Donald and his twitter account.