Russia Invades and things look bleak

I said that I could just feel that the Russia-Ukraine situation was going to break one way or the other and did. Sadly, not in good way. Putin has basically said that Ukraine doesn't deserve to exist and it belongs to Russia. He made his resentment of the break up of the Soviet Union quite clear. People knew this but he's now acting on it. Oil has now spiked to $100. As I type this the market is attempting to recover from a gap down opening on the news overnight that Ukraine is being attacked on multiple fronts. There's  talk about how bottoms happen once an invasion has occurred. I'd much rather see signs of people fearing the worst  rather than say stuff like this because while it is true, in all those previous occasions you had capitulation.  I'm no so sure we have seen enough. NAAIM sentiment has declined to 44 which is bottom territory for run of the mill corrections/pullbacks but it seems to be declining grudgingly. I want to see this at 30 or less. Put/call ratios are high but could go higher although I wouldn't say they are a major holdout. Fund flows look poised to show a negative print this week...we'll see but there is still a ways to go before all the YTD flows get unwound. We saw the VIX spike to 38. High, but certainly can go higher during major panics/declines. AAII sentiment and Investor's Intelligence sentiment are the only indicators that are showing high enough extremes, but I place more emphasis on what people are doing with their money rather than what they are feeling. 

The potential silver lining is that the Fed may end up backing off from it's aggressive rate hike plans which is what they should have done in the first place. It is clear as day that inflation pressures are primarily due to supply issues which higher rates are not a cure for. The lesser evil is for rates to stay low and we live with higher inflation for a while. Perhaps this war will make for a good excuse for the Fed to adapt this narrative and do a dovish pivot. I will not hold my breath for this but it's definitely a possibility and it looks like the market is pricing that in to some degree as odds for a 50bps hike in March are now low. 

I keep thinking of all that diamond hand nonsense and retail mania last year at this time and it makes me think that this could be indeed the start of a major bear market because that's what often follows. Even if that's the case, I do know that you get interim rallies on the way down. The problem is that if you look at 2001 or 2008 the market basically slid for the first 3 months of the year before bottoming temporarily in late March. I get that there's different circumstances but it shows you how relentless the downside could be. 

It feels utterly hopeless. Thinking of the market makes me nauseated. It feels as if it's a sitting duck to get hammered relentlessly.  I know it's supposed to feel that way near a bottom, but again, I'm not holding my breath. I have no problem if this post ends up being the ultimate contrarian indicator and it makes me look like a goat.  I think I marked the bottom in March 2020 with a similar post but I don't think so this time. It seems things can and will get worse before it gets better. I'm sure people would like to think that it's all priced in now. Is it? Or is it just wishful thinking? Again, I defer to signs of capitulation. Can we see more of it which causes further downside? Absolutely. 

Update:

Fund flows were flat for the week. That doesn't take into account today's action but this is still very  disappointing. Huge reversal in the market today but this reminds me a lot of what I saw in October-November 2008.  Until I see proper capitulation  I will have my doubts that we are out of the woods.

Russia- Ukraine crisis is going to break one way or the other very soon

The tension of this crisis is reaching a crescendo. You can just feel that it's going to break one way or the other very soon. . Russia keeps insisting it won't invade but it keeps amassing troops, equipment and supplies - at least this is what we are being told. The West keeps threatening heavy sanctions and financial markets have responded in kind by punishing Russian stock market and the Russian Ruble which has lost 2/3 of its value in the past 10 years. The question you have to ask is this. Who has more to lose? It would clearly be Russia...so it seams. So, if you are Putin and you know you're in a weak position from the start, what would you do if you wanted to extract the most amount of demands? You would do exactly what he is doing now - make it look as if you are capable and willing to carry out your threats even if that means destroying yourself in the process.  Push things to the absolute brink in order to get maximum return.  If I'm wrong, then Putin has lost his mind and is going to go kamikaze. Now, put yourself in the shoes of the West. You have the superior economic and military advantage to not give in to all of Russia's demands. Russia has more to lose choosing war but you will still lose. You still want to avoid or minimize loss and so are willing to make some concessions but only if the threat is credible. The more immanent the threat appears to be, the more credible it is and the more likely you are to make concessions but since you're in a position of strength, there's only so far you will go.  

The latest drama as I type this is Putin's decision to recognize separatist regions in Donbass as independent. If he does,  that would clearly be an escalation in the crisis as it shows a lack of good faith and opens the door for Russia to provide military support for the separatists in this region. There is also the prospect of a face to face summit between US,and  Russia. This crisis is going to break in one direction or the other in a major way quite soon, I would guess either this week or next. 

Obviously the market is fixated on the day to day drama of this crisis which will make for treacherous short term trading. The bears have overall control as the pressure is clearly on the downside. I'm seeing more signs of excessive pessimism. AAII sentiment is now clearly at historical extreme bearish territory. People have been piling aggressively into puts as the put/call ratio has been above 1 pretty much daily even when the market shows green. On the day when the market popped due news that Russia troops were being withdrawn the put/call ratio spiked to 1.3.  This shows that traders are now clearly favoring selling into strength. When bears press like this and get away with it, it's unusually late in the game for the downtrend more so in terms of time rather than price i.e. number of days left before things reverse. There has also been a major unwind in the excessive speculative behavior of traders in their use of leveraged ETFs and call options in 2021. The major missing piece of the puzzle is equity fund inflows which has been stubbornly positive YTD. I can see this week is poised for a negative inflow but we really need to see a capitulation here i.e. like $-20 M week.  NAAIM is back to 53 but again, need to see more capitulation here. With the market poised to retest or break the January lows, I think capitulation is coming. We'll see what the data shows Thursday. Until I see sufficient capitulation I will not attempt to bottom pick. 

The bottom line is that we are seeing signs of  excessive pessimism but there's holdouts, mind you, I find that there's always at least one holdout at a bottom as the indicators are rarely 100% in agreement. There's room for the market to have a breakdown lower given the precarious technical and fundamental condition of the market with the market in a ST downtrend threatening to break down to new lows and with bond yields and oil prices still near the highs.  Keep in mind, at market lows things look ugly and it feels like there's more pain in store. That's how lows get made. Overall though, the benefit of the doubt can't be given to the bulls at this point. The Russian stock market is getting destroyed today down 13% while US market is closed. Obviously this does not bode well. 

Update: Putin has declared the separatist regions of Donbass as independent which obviously is a negative towards finding a diplomatic resolution to this crisis. Futures were already in the red prior to this news and didn't change much but I can't see how the market doesn't gap down tomorrow. The only silver lining I see here is that this brings us closer to capitulation. In the long run this Russia-Ukraine situation is going to be trivial when it comes to the stock market since earnings are paramount to everything but it's certainly not going to help in the ST as the market was already dealing with jitters from higher expected interest rates due to inflation. At some point though, the narrative is going to get priced in because interest rate fears and Russia fears have been front and center stage for a while now. In my opinion, that pricing in requires capitulation from these stubborn BTFD buyers. I think we get that this week. The uber bear case is that the capitulation is just getting started. . I'm not so sure about that although like I said, I'm not giving the benefit of the doubt to the bulls. 

Can the market somehow keep it together this year?

It's becoming quite clear that the market is going to face a huge test this year. Bearish forces are clearly gathering. We know that from history, anytime we get a big flare up in inflation, at the very least it creates a multi-month period of market turbulence as the Fed raises rates and in often cases, it precedes a recession and bear market. January was a terrible month and in the heart of that decline I felt an anxiety that I haven't felt in very long time. I wasn't able to sleep well for a week. For clients that I knew would be especially vulnerable to a market crash I moved them to a safer allocation right at the bottom on Jan 24. Brutal timing, but I had a line in the sand that was crossed and I had to do it. Although there was some signs of extreme pessimism, there wasn't enough for me to delay pulling the trigger. I felt the risk of another December 2018 type meltdown was there and still is. Powel and the Fed not budging at all with their hawkish stance with oil and bond yields pilling on the pressure. The lack of  fund outflows is what's missing to signal the type of capitulation I want to see. We are seeing them now but they are modest relative the damage the recent big inflows that preceded them. Perhaps there will be selling into strength which did in fact occur last week as the market rebounded. Also, margin debt appears to be unwinding. The stats are always  delayed and so we will have to wait to see the end of January figure. Although AAII sentiment is in bearish extreme terrority, if you look as their actual positioning it has barely budged from the 70% equity exposure which is historically high. I just saw a chart of extreme buying of leveraged bear ETF which co-incided with prior lows. So, all in all, there is enough to suggest that a ST low could be in.  

We got pretty decent bounce since the low on Jan 25 but bond yields and oil prices keep creeping higher and until those 2 back off, it's going to at the very least keep a lid on the upside and at worst, put continued downward pressure on the market. Bearish sentiment as per AAII is hitting extremes and put/call ratios are high but NAAIM and fund flows are only showing mild-moderate pessimism given the damage that was done. Earnings seasons was a mindfield. Microsoft, Apple, Google and AZMN were good but Netflix and Facebook not and the later 2 got hammered. The first 4 are the true tech leaders of the FANGMAN complex and so it was critical that they did not disappoint or the market would have been smashed. Maybe they end up disappointing later this year. 

Tech sector has been woefully underperforming the broad market and value stocks, energy in particular, have been safe havens. Are we repeating the 2000 tech crash aftermath where value takes charge for the next several years?  There is clearly evidence to suggest this can be the case but there's also serious flies in the ointment. In the short term there is enough evidence to suggest the tech sector's relative underperformance is at an extreme and that chasing energy is late to the party behavior. The Russia situation is clearly keeping a bid under energy. If this situation can get resolved peacefully there should be a relief rally in the market followed by a shart retreat in oil and bond yields. I'm not going to hold my breath though. Putting yourself in the shoes of Russia, it would be foolish for them to start a war as it would be them against the world.

Getting back to the tech bubble analog of 2000 where value then took over for years. There's no shortage of people on twitter pointing this out. The bears have been squealing with delight during this decline as if they have claimed some sort of major victory. These miserable fucks have been decimated by the bull market for years on end and so they can claim zero victory even if we are indeed at the start of a new bear market. By the way, the talk that we are starting a new bear market is already out there, yet the market has dropped only about 10% from it's all time high at its lowest point.

The major problem I have with the tech bubble analog is that back in 2000 EVERYONE was euphoric about tech and valuations were higher. Aside from the fringe unicorn plays, broad based euphoria was missing. The leaders of the NASDAQ in 2000 were tied to the telecom cap ex boom related to the building out of the internet. This time around, the big tech leaders are not nearly as tied to each other and the valuations, although high are not nearly as nosebleed as the tech titans of 2000. On the value side back in 2000 energy had been a depressed sector for many years right at the time when China was on the cusp of a decade long boom  where they were buying up commodities like crazy.. That's not going to be the case this time. Although the energy sector was depressed since 2015 and rightfully deserved to have a big rebound because of underinvestment,  it doesn't appear to have the massive runway like it did at the start of 2000 and has to deal with electric vehicle sales eating away at demand. 

The bottom line is that the market will at best, face a multi-month period of consolation as it adjusts to the Fed tightening cycle and stimulus withdrawal. But there's no denying that something worse can indeed play out. Housing is another wild card. If home prices do more than just correct from these lofty levels, it could be the deciding factor that tips the economy into recession as most recessions tend to be housing led. There's clearly a lot that can go wrong this year and as such it's best to be tactical. If it is indeed a new bear market, then we are in early days and there should be a least one major rally to sell into which could perhaps begin from a lower low.  A peaceful diffusion of the Russia situation would be a great catalyst. It's really a tough call and dangerous on either side of the market, but the market is definitely starved for some good news on the macro front with respect to yields and oil pressures in particular. 

I'm still feeling anxious and nauseated when I think about the market and so that in itself should be indicator to buy.