Outlook 2025: Red flags a plenty

This is that time of the year when I look back and look ahead as to what might be in store. Looking back, a year ago at this time I pointed out how expectations for 2024 were low despite some chatter/hopes for a soft landing. At the time there were also still plenty of doubters calling for a recession such as jokers like Gundlach who had been repeating the same call since 2022. The median price target issued by Wall Street Strategists for 2024 was for a measly 2% gain. This low expectation environment made me bullish for 2024.  Not only did the market make fools of the majority but it even surprised the most bullish of the bulls and it did so with below average volatility. We had one, 9% correction in July and a  few 3-5% corrections.  Folks, how many fucking times do I have to remind you of the motto of this blog? It is there for a reason! In a nutshell, 2024 was a great year because we transitioned from the skepticism phase of the bull market to the optimism phase. But now we are seeing clear signs of excessive optimism and reckless speculation which is no bueno. 

I started seeing the first signs of excessive optimism in July as I had pointed out at the time. There's been plenty more red flags piling up since....where do I start? Positioning by fund managers towards equities and cash levels are near historical highs and lows respectively, which is the the opposite of what was the case at the depths of the 2022 lows.

Equity fund flows have been massive this year, especially since the election. On December 5th at the recent peak, there was about a 14:1 ratio of leveraged long vs leverage short ETF positioning. The last time this happened was December 2021. 

Just like in 2021, we are seeing ridiculous speculation in crypto led by charlatan Mike Saylor shamelessly pumping BTC saying stupid shit about how MSTR market cap will surpass Microsoft.  You have ridiculous meme coins like DOGE and fartcoin doing moonshots attaining a "market cap" of $1 Billion! Come on man. This is clearly a moment where you could look back a year from now and say "ya, that was a clear sign of an imminent market peak" because there is nothing more speculative than people trading meme coins, willing to gamble their money on pure air.  The fact that the action in fartcoin and other memecoins can even happen just proves what I've been saying about crypto all along....it is entirely a function of the greater fool principle. I will admit though, that I have woefully underestimated the degree and length of this crypto craze. As I had stated previously,  BTC had first mover advantage and so that's why it is more "legitimate" than any other crypto out there, thereby attracting the most money. But in the end, it is fundamentally worthless just like fartcoin and its value can only be sustained on faith and an ever increasing amount of money flowing into it. We may be at point now were a BTC crash could have systematic risk to the rest of market and perhaps even the economy...I don't know that for sure, but the risk of this is a lot higher than at previous peaks. 

Here's a survey which gauges the expectations of stocks by the average Joe...it's at the highest level ever. 

What about Wall Street Strategists? The median price target for end of 2025 is 6600. That's about an 11% gain from here. So, now these guys get bulled up after the market has risen 60% in 2 years and after being humbled 2 years in row calling for 5% gain in 2023 and 2% in 2024?  Lol. Talk about Johnny come latelies.  We've also seen capitulation recently from some the staunchest bears out there like Mike Wilson and David Rosenberg.  Here's what Rosenberg said on Dec 5 (right at the latest market peak) "The remarkable surge in the S&P 500 over the past two years has truly surpassed my expectations, especially in the last twelve months. Given that this bull market has persisted long enough, those of us who have found ourselves on the wrong side of the trade must consider adopting a different strategy. My latest memo is in no way a throwing in of any towel, rather an effort to discuss and interpret the message from the market that may not actually be altogether that irrational". Lol. Sounds like throwing in the towel to me!

We've also seen a massive underpermance of value vs growth recently and large cap vs small cap, a disparity which is similar to that of 2000. 

The rout in bonds has accelerated this trend in recent weeks but the growth over value trend has been ongoing for years. Bonds by the way, are being shunned which another major shift in expectations. Coming into this year most strategists were recommending to be overweight fixed income as expectations for several rates cuts in 2024 fueled by recession fears no doubt. Now, the expectations for bonds are the opposite of what they were last year at this time as inflation fears have come back to the fore. It's expected that the Fed will pause and cut perhaps only a couple more times in 2025. 

In prior posts I mentioned that a surge in margin debt and IPOs would be the tell tale sign of a major top. We have seen the former pick up but not the latter. I would also categorize the increase in margin debt to be not be as extreme as it was in late 2021...at least not yet. 

Then there is the BofA bull bear indicator. This is one of  my favorite indicators. It is showing a bizarre divergence from the vast majority of other indicators which are flashing red. Unlike most indictors which showed a burst in exuberance since October, this indicator went the other direction and has declined from 7.2 to 3.4 and may be even lower now!  

What is going on here? This indicator is based on global flows and positioning, not that of the US. The main driver of souring in sentiment is global fund flows, nemely,  massive outflows in China/emerging market stocks. In my October post I pointed out the opposite taking place and how my hypo-meter was flashing red for China.  Well, now that the hype has died down, I would say China and emerging markets are in a better position to form a base. Positioning in hedge fund and Long Only managers are neutral overall and even when the BofA indicator was at 7.2 it never hit the sort of extremes we saw in 2021 just prior to the market peak. So, in conclusion,  the BofA bull/bear indicator has not flashed red like the majority of other indicators I look at and is actually not far away from giving a buy signal! Remember though, this indictor pertains to global markets, not the US. 

So, in conclusion, there's plenty to be concerned about in 2025 as the wall of worry which propelled the bull market in 2023 and 2024 has all but crumbled.  There are bulls like Ken Fisher who still think we are still early in the optimism phase of the bull market. Sorry Ken, I can't agree with you here. Valuations are high, speculation is palpable and complacency has replaced concern. Back in July I postulated that we were in inning 6 or 7 of the bull market. Well, I say we are in inning 8-9 now. I'm calling for a down year in 2025, flat at best. There could however,  be pockets of opportunities in value, small cap, emerging markets and bonds. I will discuss this and more in my next post. 

Orange Optimism

I meant to post this earlier but I've been tied up. The election was a disaster for the Democrats as they were soundly defeated including a sweep in all the swing states. In hindsight everything is 20/20 as they say, but there was some writing on the wall hinting that Trump was likely to win due to the global shift towards the election of right leaning governments. People are tired of heavy handed government regulations/laws which impinged on freedoms and tired of mass immigration. It all started with the COVID lockdowns and vaccine mandates. Add to this the woke movement in which you had this fringe minority able to get a loud voice. I'd argue that wokeism was more prevalent in the US and Canada vs most other countries. These past 2 years, I got a clear sense that people were really fed up with this nonsense and were rebelling against it...and rightfully so in my opinion. The democrats did not appreciate or recognize this shift towards the right. They should have shifted more towards the center. Also, having Kamala as their nominee didn't do them any favors. She didn't earn the right to be there and did not have enough carisma. Being a women and of colour probably worked against her too.  The nasty, serial lying, convicted felon that is Trump did not deter enough people from voting for him even though he looks more unhinged than ever. Some smart people who voted for Trump like Bill Ackman downplayed Trump and his poor character by never mentioning it, emphasizing his team and the proposed policies of the Republican party. Imagine if you woke up from a 10 year coma and were asked who do you think would win a US president election a) a convicted felon or a b) a former district attorney?  lol.  

Leading up to the election night, the market had pulled back modestly. Recall in my previous post how I noticed the elevated VIX as a sign of hedging election uncertainty. I also mentioned that this tends to be wall of worry behavior which creates a coiled spring action once the uncertainty has been lifted. That's what ended up happening with extra emphasis given that prior to the election, a Republican victory would be viewed as bullish for the market given the 2016 "playbook". The big rally we got was accompanied by a big collapse in the VIX. We also saw crypto do a moonshot since Trump had been hyping btc. A lot of folks felt compelled to chase risk assets on all this Orange optimism. Count me out. 

Prior to this moonshot, the market wasn't sufficiently oversold and cleansed of the excesses I had pointed out in my prior post.  This post election rally reeks of emotion, fueled by hedges being dumped en masse. The other issue with this rally is the steep rise in yields. A prolonged trend of rising yields like this tends to eventually short-circuit an equities rally. Yields have been rising primarily due to inflation fears from proposed tariffs. 

The message I have continues to be one of patience. Chasing the market after it had a knee-jerk, emotional response placing it in an overbought condition, already up massively YTD, accompanied by hostile yield trends, is simply a very poor risk/reward set up in the ST. I don't give a fuck if the market just keeps going higher. I will not have FOMO.  

Best to be patient

Since my last post the market had advanced modestly by about 1.5% despite stating that the ST condition was not ideal. This has made ST conditions even less ideal, as multiple indicators show complacency/greed has increased further. However, there's a couple that are not, one of them being the VIX. With the VIX at 20 + it's quite overinflated given realized volatility has been much lower, The reason for the overinflated VIX is quite obvious - election uncertainty. Given how tight the race appears to be, there is some justification for this, but regardless, elevated levels of uncertainty tends to be wall of worry behavior and leads to a coiled spring action once the uncertainty is lifted. When indicators are conflicting like this, it's best to take a step back and evaluate the evidence in totality. The bearish indictors as follows: 

1. A string of low equity/put call ratios including Friday's 0.44 which is the lowest reading in 2 years. 

Given the current low reading of the 21 DMA of equity put/call ratio, history shows we are close to an intermediate term top. It also shows there's room for one more little push higher before hitting the top.

1. Massive equity fund inflows in recent weeks. 
2. NAAIM exposure at 90% long
3. AAII bears at 20% 
4. Fear/Greed index at 74
5. BofA bull/bear indicator at 7 - closing in on 8 which would be a medium/long term sell signal 

Let's look at the components that make up the bull/bear indicator

I'm not sure whether the 6 components have an equal weighting or not, but I believe the 3 most important components are the ones that have to do with investor behavior as per the motto of this blog.  Notice that the Hedge fund (HF) and Long only managers (LO) are at low levels of exposure, whereas as equity flows are  just about as high as it gets at 99th percentile. This is a really strange and rare divergence. On Feb 10 there was a similar condition where fund flows were very bullish yet positioning was on the low side of neutral. The market only got a drawdown of about 2.5% before marching higher.  This 99th percentile in equity fund flows is largely due to a record surge of EM inflows, i.e. people chasing Chinese stocks (more on this later).  

Let's look back at 2021, the last time the market hit a major peak and compare conditions to now. In Feb 2021, the BofA bull bear indicator had hit a peak of 7.8 and more or less hovered at 7 or above for most of the year. During this time there had been several occurrences where the  HF and LO readings were 80+ percentile including at least one instance where the HF exposure hit the 98th percentile and LO hit 100% percentile.. For the most part of 2024, positioning has been neutral  with only a few occasions where HF exposure hit 80+. With the market at all time highs and positioning from HF and LO underweight, it suggests were not in danger of hitting the ultimate top.  At the ultimate top, t's likely we will see an "all in" condition, not only with the BofA bull/bear indicator but probably other things as well such as IPOs and margin debt. What happens between now and that point is tricky because as previously mentioned, the ST conditions are redlining here. Ultimately,  I believe the market will make a significant move higher due to the unwinding of the VIX hedging and low HF positioning, but it seems difficult for that happen without a least a modest-moderate pullback first. Regardless, I'm not chasing the market here. I respect that it can just keep marching higher and so I won't stand in its way but I'm not chasing. I never chase. 

Regarding this latest rally in Chinese stocks, the current enthusiasm I'm seeing reminds me of the last failed rally of early 2023 when everyone was super bullish on China because of the end of lock downs. This time  lot's of people are stoked because of easier monetary policy and other government stimulus measures. Seems like a slope of hope bear market type rally to me. I know Chinese stocks are cheap but you can't make apples to apples comparison to stocks in free market economies not to mention the dreadful fundamentals of the Chinese real estate market which I doubt can cured by these latest "stimulus" measures. Admittedly, I don't have much knowledge of the Chinese economic situation but my "hypeometer" is clearly telling me to beware of this move. 

Bottom line is that the ST is sketchy as there is mounting evidence of an intermediate term peak coming soon,  but it's unlikely the bull market is in danger of ending just yet. Any upside from here is likely to be given back and thensome, but it's also likely that any pullbacks wont be deep given the wall of worry imbedded in the VIX and positioning. At most, I see about a 5% pullback once the peak is made. Am I super confident in stating this? No. Am I being too fixated on the ST wiggles of the market? Probably...

No shortage of doom analogs

In my last post I warned about a rug pull and that's exactly what happened. The market dropped 4.5% the subsequent week and this resulted in a sentiment reset as traders/investors ran for the exits en masse as per fund flows and positioning stats. The losses were recovered in the following week and then we hit new ATH yesterday, the day after the Fed cut .50.  Heading into the Fed meeting, the futures market was  60/40 in pricing in a .50 vs .25 cut. I was personally expecting a .50 cut.  Apparently only 10% of economists polled by CNBC were calling for .50...no surprise there. I was talking to a fellow advisor prior to the announcement and he echoed the consensus view that a .50 cut would signal a panic, i.e. that they know something we don't. This is nonsense. The Fed is simply catching up to the data. We've had plenty of evidence, painfully so, that inflation has moderated to the point where a 5.5% Fed fund rate is well into "restrictive" territory. The core PCE, the Fed's preferred inflation gauge has clocked in at a yoy rate of 2.6% for the past 3 months and add to that the recent soft non-farm payroll numbers and major downward revisions from prior months, it would be quite frankly, idiotic for the Fed to cut only .25%. Had they known about the downward revisions to payroll prior to their July meeting they probably would have cut .25% instead of doing nothing and so .50 cut is simply a catch up move. At 5% FF is still well above the neutral rate and so the Fed  has cover/justification to cut .50.,,, the FF should already be at 4% is you ask me. 

After the Fed announcement there was no shortage of hand wringing on twitter. If I had a dime for everytime someone made a reference to 2001 and 2007 I'd be a fucking millionaire.  Here's a few excerpts: 

"Today was the first rate cut of 50bps since March 2020, let's look back at rate cuts when the market was near highs in 2000 and 2007". 

"The last 3 times the Fed started a rate cut cycle with .5% was 2001, 2007, 2020"  

"Fed only cuts rates when the economy is in the gutter or about to go in the gutter. The fact that they did proves my point that we are in recession"

These types of post were flooding my "for you" page on twitter. If you're in this camp, you are in consensus. Please make note of the motto of this blog. The current doom analogs remind me of all the analogs in 2022 that compared the market to 2008. After the COVID crash it was the 1929 crash analogs were all over twitter. What you will hardly see on twitter are mentions of  1984, 1995 and 2019 whereby Fed cuts did not signal an immanent recession and were instead recalibration cuts. IMO, this is the most likely scenario we are dealing with here....at least for the next year or 2.  The economic conditions in the US although moderating are still healthy overall. I'm sure you can show me some stats that suggest otherwise but there's ALWAYS something negative you could point out whether it be this year, last year or any other year the economy was in expansion. Corporate profits are  healthy, layoffs are hovering near historical lows and credit spreads are calm....NOT something you see when there's an imminent recession. Also, private and corporate leverage is near 30 year lows. Before you point out rising credit card debt, please look at the trends in overall debt including mortgage debt which makes up 70% of  the total and make note of the percentage of disposable income being used to service all debts in the US - it's 9.8% which is at a 40+ year low. You will find similar benign stats regarding corporate leverage. Oh, but look at the huge increase in government debt! Yes, that's true, but government debt is not the same as private debt as governments have something you and me don't....a printing press, but that's a discussion for another day. For now, just look at Japan to see how far things can go with their 250% Debt to GDP ratio. 

The main message of this post is that there is plenty of moaning and worry about this rate cut cycle. Fears of a recession are acute and that suggests there is still a healthy wall of worry for the market to climb longer term. What happens in the next few weeks is probably more volatility. Once again, in the very ST, conditions don't look ideal but the more medium term indicators have cooled off/reset notably compared to how they looked like at the July market peak. If we get another bout of downside it would probably recharge the medium term indicators even more putting the market in a position to make a significant upside breakout later this year.   

The black hole of pessimism

This is going to be a philosophical post, but first some market comments. Jackass Hole and the balleyhooed NVDA  Q2 report turned out to be relatively non-events. The SPX is now one modest up day away from making all time high, with the NASDAQ notably lagging. The DOW has already made marginal new all time highs. What this is showing is that value/industrial type stocks have been market leaders as of late. Will this end up being temporary or long lasting? I've been meaning to do a post on this, but not this time. In the very short term I'm not very thrilled with the set up on the long side. We saw an extremely low put/call ratio reading on Friday coming into a weak seasonal period. I know it's just a single reading but more often than not, you'd be better off not entering the long side for at least a few days. Fear/Greed now at 63 which is moderate greed territory....still room to go higher before hitting extreme greed though. NAAIM exposure back to 81 which is on high side. Here’s another thing I’ve noticed….the CDN dollar has spiked lately and you typically see this near ST tops. Bottom line is that momentum is with the bulls and new all time highs are certainty doable this week but the ST sentiment backdrop shows that the risk of a rug pull is high. Unless your the daytrading type (which I am not), wait for a better pitch. 

I want to discuss pessimism, not only about when it comes to the market, but in general. I have found that once someone becomes a pessimist on the market or a pessimist in general it becomes very difficult for them to let go of it.  It seems once people cross the event horizon of the black hole that is pessimism, they get sucked in and can never escape. I'm not sure exactly why this is. I do know that many bearish/doomer arguments tend to be convincing and logical but the weakness of many of them is that they are rooted in dogma - "the market should be doing this because it's what I believe it ought to be doing" is at the heart of a lot of them. Perhaps the pull of pessimism is somehow tied into our natural inclination of being risk adverse.  I'm sure you've heard about the notion that for the average person, the pain felt after a loss is at least twice the intensity of the joy felt after a win. I know from my own experience the pull of market pessimism. When I started my career 24 years ago I had a bearish outlook on the market which was based on fundamental factors. As we went through the 2000-2002 bear market, my bearish beliefs become validated and even more entrenched. I consumed a lot of bearish content such Hussman, Fleckenstein and the late Richard Russell to name a few. When we had the first powerful rally from the March 2003 lows, I was able to snap out of the bearish stranglehold that was on me because I was open minded/aware enough to see that the market's character had changed. It wasn't just because the market was going up, but the way it was going up. Obviously I was grateful that I changed my posture so as to be on the right side of the market, but it was also good not to be a market pessimist anymore as it was impacting my outlook on things in general. When you're a bear/pessimist you are hoping to see bad news in order to validate your position.  This is toxic. This can turn you into a miserable son of bitch. I wasn't a miserable person from 2000-2002 but I was a doomer. I did notice however that most other bears were indeed miserable SOBs - they were also doomers in general and I suspected their bearish market disposition was a reflection of their general negative disposition and that there was probably a negative feedback loop in play. They seemed like depressed, miserable people - one guy even admitted it. When I was bearish back in 2000-2002 I remember expressing this to one of my friends at the time. At first he wasn't convinced but by 2002 he was. By mid 2003 when I was convinced that the market had changed tune and expressed this to my friend, he wasn't buying it and he never did all throughout the bull market of 2003-2007.  A co-worker/friend of mine whom I first me in 2006 was young and optimistic on the markets when he first started his career. The 2008 crash made him become more cynical but not overly. A couple of years ago he got caught up in the meme stock conspiracy and since then has become a doomer.  Everything is rigged according to him. He has also had some challenges in his personal life in recent years which likely makes him more susceptible to being a jaded doomer.  If you become a market bear when you are bearish on your personal life or world view in general, it would be toxic combination as these 2 dispositions will feed on each other causing you to lose market objectivity and simply turn you into a miserable, cynical SOB.

What good is it to be a pessimist in general? Let's say you end up being correct and the world ends up going to shit. Is that going to make you feel any better? It's not. You'll still be a miserable SOB. But what if your negative outlook doesn't come true and things turn out to be positive or a lot less bad than you were expecting? You will feel like such a fool as you realize you waisted your energy and your life being negative which no doubt would have caused you to miss opportunities. not living up to your full potential. When you're a pessimist, you will seek out bad news and probably hope for it, whether you realize or not. This is a sad and wasted life. All major human progress and innovation were the result of people being optimistic about an idea they had.  Yes, plenty of  people who had ideas failed but if everyone was a pessimist none of the successes would ever had happen. Imagine if the Wrights brothers were pessimists like many of their early critics There is no way they could have overcame the countless number of failures and roadblocks to eventually create a plane that could fly. Now, don't get me wrong. I know there's a difference between being an optimist and being delusional. Somethings are out of reach and no amount of optimism can change that. My daughter is a lifeguard level swimmer,  but she's a slow runner. If she were to tell me that she aspires to be an Olympic sprinter, I would definitely discourage her lol. 

I believe that the correct approach to life in general is to be a level headed optimist. Be mindful of what threats are out there and what can go wrong, but I don't see the point in living a jaded life, a life of fear always expecting the worst. It will be a wasted life. If you look back in history there were plenty of  times I'm sure a lot of folks thought the end was nigh.. Imagine how many doomers there must have been during the peak years of the cold war era shortly after the cuban missile crisis.  Somehow, someway we find ways to move forward,  we innovate, we change, we adapt, we advance and this can only come about by having a positive disposition - having the belief and drive to find the solutions, the advancements, ect.  Of course, advancements can create a whole new set of problems but are we better or worse off compared to 100 years ago? Anyhow, I digress here. The bottom line is that there's no benefit in being a pessimist. Problems don't  get solved by pessimists, advancements don't get made by pessimists whether it be on a personal or societal level. Let's say you're a pessimist about society and you end up being right and the world does go to shit... you're still going to be a miserable fuck,  but if you end up being wrong, like everyone else before you, you're going to be even more miserable and full of regret as you come to realize you waisted your life being worried and negative while you could have done so much more with your life by being an optimist.   

Circling back to the markets, when people first start investing, they are optimists by default because they buys some stocks in the hopes that they will go up. Then at some point they will experience a bear market and run the risk of getting sucked into the black hole of pessimism. I believe this was the case for a lot of investors/traders during the past 24 years, because during this time we have seen 3 major bear markets of 35-50%, and 3 mini bear markets of 20-25%.  When you experience a heavy loss, there's 2 ways to handling it - you get jaded and blame it on the "powers that be" or you take ownership, learn from it and try to improve. Most people fall under the former category because they tend to have this attitude on life in general. When something goes wrong, it's not my fault - it's the other guy's fault. It's easier to shift blame than to take ownership when something doesn't go our way.  You see it with sports fans too - "if it wasn't for the ref we would have won!"  It's easy to fall into the black hole of pessimism. For me, I was always able to avoid doing so. There have been a few dark times in my life both personally and financially when I could have easily fell into it. Of course, I felt down and negative when these bad things happened but it didn't last for a long time. I had the awareness to know that being negative wasn't going to make things any better, it would only  make it worse and the only way to make things better is to take positive actions. The longest I ever felt down was when a girl I had a big crush on ended up finding a boyfriend just as I was getting the courage to make a move.  I remember how I felt when I found out. It was the worst feeling I ever had and it left on scar on me....maybe that will be a story for another day.  

All eyes on Jackass Hole

Yes, I said Jackass Hole...more on that later. First off, so much for the yen carry trade meltdown. I thought the yen carry trade was such a big driver of US stocks for the past x number of years? Hyperbole just like I said. The market has recovered all the losses from a couple weeks ago and is closing in on the previous all time high. At the lows we saw excesses get purged as I had pointed out. Sentiment had been sufficiently reset for a solid low,  but now with this V shaped move, some excesses have quickly built up again. Put/call ratio these past few days have collapsed back to the complacent levels seen at the July peak. Apparently the CTAs are slated to be buyers over the next few weeks whatever the market does lol. There's guys are hilarious. They puked everything near the bottom and now buying it back 10% higher. AAII sentiment released this morning shows 2:1 bull to bear ratio, the same as where it was in mid July. NAAIM exposure which had dipped back to 56 last week is back up to 75% - not extreme but notably higher. So, all in all, the ST condition of the market is now stretched. However, having said that, there are some ST-medium term sentiment resets which still have ample room to unwind further. Fear/Greed index sits only at 54 for one. Hedge fund and mutual fund positioning had a significant unwind in tech stocks which is still in place.  I read an article on marketwatch which says tech stocks make up 16% of hedge funds portfolio. Compare that to the S&P 500 which has a 30% weight, it seems modest. Apples to oranges you might say. Fair enough, but what about this:  According to Goldman, US mutual funds are the most underweight tech stocks in 10 years. When the Mag 7 were getting hit a few weeks back, I saw a lot of chatter about how the AI bubble may have popped citing the same concerns I had listed in my July post.  That to me is a sign that such concerns will end up being premature at the least or wrong at the most. You see, when a bubble truly bursts you tend not to see major bubble-pop proclaiming come out until after major damage had been done i.e. 40-50% type damage. I had estimated in July that we could have up to another 9 months before the AI party would be over. As I had mentioned, the major thing missing to flag a major peak in AI is a flurry of IPOs. It would appear that the recent rout in tech was simply a reset from a very overbought condition. We shall see...

So, the main event at Jackass Hole is tomorrow. Expectations appear to be high for Powel to deliver a dovish message. The market is clearly expecting rate cuts to start in Sept which is pretty much a lock. So, what's the expectation? Are we primed for a sell the news reaction if Powel hints that only a 25 bps cut is in the cards? I know there's folks out there who want to hear that Powell is willing to consider 50 bp rate cut. The futures markets is currently pricing in only about a 30% chance of this happening but futures markets can be fickle. A couple of weeks ago I believe this percentage was around 80% but don't quote me on that. Given the ST overbought conditions of the market, ir would not surprise me to see a knee jerk decline post Jackass Hole, especially if Powell delivers only a mildly dovish tone.  

The obsession with the Fed dates back to at least 1998 when they did emergergy rate cuts in response to the LTCM debacle. Given all the crises that we've seen since then, the Fed has been viewed as this omnipotent force that pulls all the strings of the market. "Don't fight the Fed" is a mantra that's ingrained into everyone's psyche. Well, if you look at history there's times when this has turned out to be true and other times where is hasn't. 2023 was a great example of how fighting the Fed by being bullish was the right move as they were still hiking rates. 2001-2002 was another time when fighting the Fed was the right move by being bearish as they cut rates aggressively. Never blindly follow popular Wall Street adages. Context matters and markets are not meant to be so obvious otherwise we would see a far greater percentage of active managers beat the market. I clearly remember in Jan 2001 how CNBC was celebrating the Fed's first rate cut which was 50bps. They showed a statistic that the market was always higher 1 year following such a rate cut except for 1929. At that time I was a bear and I remember thinking "and what happened in 1929? It was the bursting of a stock market bubble, the same was this time!"

So, what is the context of rate cuts this time? I know there are some people hopeful about it but I also  see plenty of people showing an ominous chart of when rate cuts have started from elevated levels like this i.e. 2001 and 2008. Once again, people are just blindly adhering to analogs without taking context into consideration. The rate cuts in 2001 and 2008 were a response to a clear deterioration in the economy. This time around, the rate cuts are slated to be in response to clear deuteriation in the rate of inflation - an inflation episode which had been the result of a pandemic rather than structural issues. The economy, while having slowed is still healthy. Of course, this can certainly take a turn for the worse but as it stands now you can't argue that the US economy is showing deterioration comparable to that of early 2001 and early 2008. You can't argue that the consumers and/or businesses are as levered as they were back then either...not even close. You can't argue that credit spreads were blowing out as they were back then either. Again, I'm aware that things can change rather quickly but as it stands now, the situation we are in is not comparable to 2001 or 2008. The one thing you can argue is that valuations are historically high on some traditional measures, but that in of itself is not a predictor of major market peaks. But isn't the Fed behind the curve? Yes they are, but it doesn't matter as much as people are making it out to be. The bond market is doing some of the heavy lifting of the Fed already as long rates have declined notably in anticipation of lower short rates.  

Inflation subsided naturally, not because of the Fed. I've stated this ad nauseum for the past 2 years that this would be the case. As I predicted in my Inspector Gadget Fed post back in 2022, everyone is giving praise to the Fed for squashing inflation when in reality it was natural market forces that did the heavy lifting. In the US, rate hikes took place at a time when a lot of debt was termed out and generally speaking rate hikes can have conflicting effects on inflation because on the one hand it can crimp loan demand but on the other hand it can stifle supply as it raises the cost of capital, which in turn can raise the cost of goods and services and it also creates more money in the form of higher interest payments to savers. Since the inflation episode we had was largely due to a supply shock I would argue that hiking rates probably did more harm than good when it came of fighting inflation given its impact on supply side of the equation. I have argued that consumption is stable and generally inelastic and so hiking rates would have limited impact on it,. I was correct and yet it was the consumer that the Fed was targeting with their hikes. Deep down they were thinking "hopefully the rate hikes will create some unemployment which would cool off inflation".  A naive and hopeless notion, which did nothing to address the actual cause of the inflation which was the supply side shock. Anyhow I digress. 

Bottom line here is that this market is likely going to be in highly emotional state for the next few months given the inflection point in monetary policy. The narrative can easily go from "rate hikes are good" to "rate hikes are bad" to explain why the market is going up or down because everyone is so Fed obsessed. Add to the mix the election clown show that awaits us and the dreaded months of September and October. But at the end of the day, it's all about earnings.  Are earnings going to be in tact? That's what matters and that's the main question one should focus on. So long as they are slated to remain in tact or improve, everything else will be just noise, as scary as the action may get. I know that can be difficult to have faith in when you're actually in the midst of bad market action because I know I myself always can't help but have doubts. This is one reason why I do these posts as I can look back to see what my logical/intuitive brains was thinking when my emotional/privative brain starts flaring up. If the market starts declining from here, I bet you're gonna get lots of fretting about a dreaded double top.  Let's see how things play out....

Japanese contagion

No shortage of drama in the markets as of late. Adding to the growth scare I had discussed, we have seen a meltdown in the Japanese stock market, down 12% last night. Apparently this has been fueled by the unwind of the yen carry trade which will had spill over effects to global markets. The narrative basically goes like this: investors had been borrowing in Japanese Yen at 0% for years and had re-invested this money globally to take advantage of higher rates. This trade will work so long as the value of the Yen stays the same or declines. For the past 3 years the Yen has been in a steady decline and so this trade was a a huge money maker, but in the past 4 weeks the Yen has had a surge due to the BOJ raising rates from, get this,  0.1% to 0.25%. LOL!  But I believe that expectations for the US Fed to cut rates imminently after that weak July jobs number fueled the fire even further and may be the bigger factor. As crowded as this carry trade may have been, I have serious doubts that it was one of the main things underpinning the run in US stocks which is is a narrative that I'm seeing. Sure seems like the unwinding of this carry trade is a lot of hyperbole to me. And if this carry trade was being used to buy global assets, i.e. US assets, why is it that the Japanese stock market got hit the hardest? Beware taking market narratives at face value. 

The VIX tagged 65 this morning. Wow.  You got to back to the depths of the COVID panic to find a similar spike and before that, the depths of  the GFC. So far the markets have clawed back a lot of the initial morning losses but I won’t hold my breath . I mentioned the unwinding of the excesses in my previous post. Well, today should pretty much rinse out all the excesses. Fear greed hit 18, put/call ratio has surged and the VIX has moonshoted. The weak handed momo types are now flushed out for sure after today.  Lots of people crying for an emergency Fed rate cut. Not sure to make of that, as this. On one hand it could provide a psychological boost as most investors are monetarist zombies and Fed is indeed behind the curve right now. On the other hand, if this sell-off is being fueled by the carry trade unwind, cutting rates would make it theoretically put more pressure on the yen carry trade unwind as it would lower the value of the US dollar (at least initially). The solution IMO, would be for the BOJ announcing some sort to intervention or signal to calm the market.   

In my July post I mentioned that I believed we were late cycle in this bull run but not done yet. If I'm wrong about this and July was in fact the top, then there will likely be another rebound still left whereby the market retests the recent high or comes close to it. Coming into 2018 was a time which I had warned about the complacent condition of the market. The market had a sharp drop in February but then  eventually recovered all the losses by the summer, then the market eventually rolled over in the fall and made new lows by the end of the year. In August 2007 the market had shown the first major crack which ultimately led to the GFC. This is when Cramer famously has his "they know nothing" rant. But by October the market recovered all the losses and actually made an all time high before peaking for good. So, my point is that it's likely that if a major correction or bear market is in the cards, the market would likely still give you a better opportunity to exit as tops usually take a lot of time to form. In my opinion, we did not see enough conditions met for a major top and this current decline appears to be a correction, but as I said, I think we are late in the cycle and so I'm open minded to the possibility that I could be wrong and that we are in the process of forming a major top. 

Growth Scare

The market has taken quite a pounding late last week thanks to a "growth scare" that has now gripped the latest narrative with the latest news piece being the weaker than expected July jobs report.  Coming into the year we had expectations for 6 rate cuts which by end of April got revised to 1 or 0. At the time I had suggested the pendulum had swung too far given such low expectations. Now, not only is a rate cut a lock in September but the market is pricing in a 75% chance of a 50bps cut! What a manic depressive market.  The uptick in the unemployment rate has triggered a recession call as per the  SAHM rule and so now the "R word" is now back on the table further fueled by fears that the Fed is behind the curve. First of all, the uptick in the unemployment rate as of late is coming off all time historical lows, and at 4.3%, is still quite low. Higher labor force participation rates and to a smaller extent the impact of Hurricane Beryl are at least partially responsible for the uptick. If you look at announced monthly layoffs you will see that they have actually been declining and remain near historical lows and so it would be more alarming if the rise in unemployment was due to job cuts. So, yes, there has been less hiring for new jobs but there hasn't been a massive wave of layoffs either.  Anytime the SAHM rule had a successful recession call it was accompanied by a significant rise in layoffs. The leading indicator of layoffs is corporate profitability which is currently quite healthy. Absent a shock of some sort, economic growth should just ebb and flow.  One might argue that we may soon feel the effects of the Fed rate hike campaign and therefore the shock is immanent. The bears will say that it took longer than most expected but now we are about to get the reckoning. I just don't see the evidence of that. In Canada, yes, this is a valid concern as a massive wave of mortgage renewals are coming in the next 2 years, but in the US, debt was termed out by the majority of home owners and large corporations in 2020/21. There is stress in commercial estate market no doubt. Could that end up being a shock? Perhaps, but I have my doubts that this is a big enough problem to derail the economy....I will definitely need to look into this further. But so far as what the evidence says right now, recession fears are premature in my opinion. 

Let's discuss tactical. In my previous post I warned about the precarious positioning that was in place. The usual cadre of momentum chasing, sheep traders/investors were all in on the market by mid July. These weak handed folks were only long because they chase momentum and so once the tide turns these "savvy traders" will puke their positions en masse and this is what happened. On Friday, the VIX just about tagged 30 , fear greed index hit a low of 24, the put/call ratio  hit an intra-day high of 1.46 before settling down to 1.16. These are the types of things you see near a ST low. Given the extent of the excesses we had prior to the recent peak, it could take more time before the market can regain its footing, but there's enough evidence to suggest that most of or perhaps even all of the damage is done. The last time we had a VIX this high was during the depths of the 2023 "banking crisis". Last year at this time we had a similar situation with the market. Recession fears were palpable and the market didn't ultimately bottom until October. Maybe we see that again, maybe not. Beware of using analogs because they rarely work.

I got this chart from Twitter posted by Tier1 Alpha which stated "Our Systematic Positioning index, which tracks Vol Control, CTA, and Risk Parity strategies, just crashed to the lowest level since late 2023. So, with just a mild pullback of about 6% with the SPX still up 13% YTD, these folks are now at a YTD low in exposure. That's a significant reset. Yes, exposure has room to decline further but it has already declined by such a large amount, disproportionate to the 6% pullback in the market. I've read somewhere that CTAs are slated to continue selling a lot more for the next 2-3 weeks. If that's the case, it would suggest that a lower low could be in the cards or that the market would need time to consolidate even if the low has been made. It's just one indicator mind you, so don't hang your hat on this alone.

Let's forget about all the narratives for a moment. In any given year, the market has 5-6% corrections about 3.5 times on average, and a 10% correction 1 time on average. This is now the 2nd 5-6% correction for the year and the market is still up 13% YTD and so there's nothing out of the ordinary happening so far this year. Meanwhile the VIX spiked to 30, fear/greed hit 24 and CTA's are already running for the hills. Let's see when NAAIM and AAII sentiment stats get released on Thursday but so far the evidence from pure sentiment/positioning perspective suggests this is a bull market pullback which has had enough of a sentiment reset already to establish a bottom or be in the vicinity of one.

Warning signs

It's been a while I know. Trump assassination attempt and now Biden stepping down...wow. Both these events are once in a lifetime type shit and they happened in just over a week.  Since my last post the market has chugged higher with only minor pullbacks and we are in the midst of a pullback now. I'm seeing some things that are worrisome for the market. This whole AI driven run feels to me to be over hyped or at the very least, more than discounted in the short to medium term. First of all, just look at the charts of these stocks - they are parabolic. Using my "waking up from a 5 year coma" perspective, if  I saw a chart of NVDA it would scream bubble to me...or at the very least very overextended. The brother -in-law and client of my branch manager, a person who is known to do the wrong thing at the wrong time when it comes to getting in and out of the market, had inquired about AI funds recently. I mean Jesus Christ, where were you a year ago? Hiding in cash is where. I just read a really good report issued by Goldman Sachs in late June which discussed the AI boom via interviews with some of Goldman's highly ranked analysts and a professor from MIT.  It provided both positive and skeptical points of view. The main points of the skepticals are that there's been a lot of spend and not much to show for in terms of a return on investment and there doesn't appear that this is going to change anytime soon. AI is costly to implement and yet there's no "killer app" which is going to move the needle significantly enough to justify the investment generally speaking. Whatever automation benefits AI does currently provide is simply not enough to justify the high cost since AI is not capable of doing complex tasks. Replacing just the simple tasks using AI doesn't move the needle much given the costs.  The optimists will counter that AI costs will decline over time just like all new tech innovations tend to and that AI will be able to ultimately replace 25% of all work tasks, but even they concede that this is not expected to happen anytime soon and that currently it's a story of "if you built it, they will come".  I side with the skeptics on this AI debate. So far it's been primarily the picks and shovels companies who have benefited i.e. the NVDAs of the world. But it seems to me that it's just a matter of when not if, all of this AI spend peaks and then declines as companies who have been investing in this realize that the return on investment is just not there. There has been a big case of FOMO with AI spending and it appear that many firms don't even have a gameplan on how to incorporate it. There's also the risk of AI backfiring in some cases as companies try to incorporate automation too quickly or incorrectly as they feel pressured to do something with it. Lot of people, even one of the skeptics in this GS report, think that there's still a ways to go before we see the "bubble bust" for these picks and shovel companies. I don't share that notion. Based purely on the duration and intensity on the hype, my gut instincts tells me the end game is coming sooner rather than latter - within the next 9 months is my best guess.  

According to the Economist,  MSFT, AMZN, META and GOOG plan on spending $200B in AI this year which is 45% more than 2030 which itself was a huge spend. Venture capital firms have been tripping over themselves investing in AI start ups - they invested $27B in Q2 alone. The last time there was a frenzy like this was with blockchain companies back in 2021....and how did that go? What is the killer app for blockchain? Shitcoins? The hype was similar to AI now. What's missing to mark a peak is an AI IPO frenzy but I suspect that's coming soon. 

There's other things that were and are bothering me about the market from a short term point of view. There's been a lot of FOMO in general from market traders similar to that of last year at this time. Once again CTAs had piled in to the long side like lemmings just prior to this recent pull back.  Put/call ratios had finally given up the ghost as well. Remember how I have been saying for quite some time how they were elevated? Not any more. Fund flows have spiked including those that bet on bullish leveraged ETFs. 

This chart would suggest an ominous bull market killing euphoria but it's only one indicator. Also, it could end up being the case that the peak happens at a significant higher high as was the case in late 2021. 

The put/call ratio while showing low readings recently is not at the extreme lows we saw in 2020/2021. So, it could very well be the case that we saw a ST peak, not the bull market peak. 

And then there's the BofA bull bear indicator. If I was forced to only follow one market timing indicator, it would be this. It is currently at 6.5 which is the high side of neutral. Bull market peaks or severe corrections of 15%+ have not occurred until we saw a reading of at least 8 and we are one surge away from that.  We can still however get 5-10% corrections at current readings or lower as was the case last year and so for now, it's suggesting no greater downside than that.  

AAII investors allocation to equities has just broke above 70% in June which is where the market tends to run into trouble. The last time it broke 70 was March 2021 and it hovered there until the market peak of Nov 2021 and so although the market didn't peak right way when it broke 70, it was a signal that the bull market run was much closer to the end than the beginning. 

So, all in all it would appear to me we are in inning 6-7 of this bull run. There is still room for one last euphoric push higher before the year is over. Perhaps that happens once the Fed starts cutting rates. Everyone is such a monetarist "zombie" to borrow a term from Mike Norman. Most seem to think that monetary policy is the end all and be all of the market. They were largely incorrect in being bearish as the Fed raised rates and they may very turn out to be incorrect again if rate cuts are celebrated as an "all clear" to buy stocks. Initially, yes, Fed rate hikes were bad for the market but the market essentially bottomed in June of 2022 (October was slight lower low) when the bulk of the rate hikes still lied ahead. 

I suspect there's still a significant amount of money on the sidelines still clinging to their 5% HISA/T-bills who are on the verge of capitulating and getting back into the market. Rate cuts would be the trigger to squeeze out a lot of these folks. I know I'm getting quite ahead of myself here. As always, I defer to the indicators but I will say that for the first time in quite some time, I'm getting worried about the market.

In my next post I'll discuss what may be a possible regime change that is immanent. 

Better to be lucky than good

It's  been quite a while since my last post. I've been busy with work and still am but I got some time now to do a post. 10 years ago to this very day, April 28th 2014,  Greenstar announced there would be a delay in filling their year end financials and so began the chain of events that led me to where I am now. Greenstar ended up being a fraud and I had made the foolish move of putting pretty much all my eggs in one basket. This loss ended my 6 year stint as a full time private investor. It forced me to find a "real job" in order to support my family.  Having not had a real job for so long, I had to start by taking a job that was well beneath my capabilities. I built my way back up but there were still ups and downs, My 2nd job was a nice upgrade but was still below my potential.Then I got offered a job with a firm that promised me the world but ended up pulling the wool over my eyes and I was basically forced to leave which placed me back to square 1 without a job, but the ironic thing about this was that I had made the connection with the firm I am with now as a result of working with that clown show of a company I left. I could not have landed in a better place. Literally. The people, the opportunities, the location were all I could have hoped for. It started off slowly but now, after 6 years with this firm, I'm in a really good spot - far better than I likely would have been had I never invested in Greenstar  (I ended up recouping my losses in Greenstar by the way, thanks mainly to my big score in Foran mining stock).  I’m now in a position where I can be effectively be a private investor again and have a good "real job" at the same time. It's amazing how in life, a single incident can dramatically shape the course of your entire life. Was I lucky? You bet your ass I was. Yes, I did make the most of  the opportunities but I'm not ashamed to admit that luck was just as big a factor if not bigger. 

Things were already looking good coming into this year but now I've had even more good luck come my way. ..so much so that it's making me fearful that I'm overdue for some bad luck!  I'm also feeling a bit guilty about this luck...let me explain. There was this advisor at our branch who recently had to retire because of long COVID symptoms and so he had to give up his book of clients and decided to transfer them to my partner and I. We  had  a zoom meeting with him to discuss his key clients and we were expecting him to mention something about compensation for him handing over his book of business, but it never came up! He ended the meeting by wishing us all the best and thanking us for handling his clients. It's been 4 weeks since and no follow ups from him mentioning compensation. I know he had a liking to my partner because my partner had helped him with any tech and admin issues. He is a young guy and so perhaps he gave the clients to him as a opportunity to get ahead in his career.  There is now another advisor who had to retire due to illness which apparently has taken a major turn for the worse as she will now be in hospice care. We were given the opportunity to acquire her clients and we were supposed to have a meeting with her to discuss compensation but she has now apparently fallen terminally ill and so this is no longer possible. We will likely either get her clients for free or pay a fire sale price for them. So as you can see, I can't help but feel giddy and guilty at the same time as I have been benefiting from the demise of others.

When I look back at my life, I can see how I was blessed with so much good luck in general. There were moments when I was on the brink of the abyss both from a personal and financial perspective but somehow, someway I would get rescued, often just in the nick of time, like if you're on a highway and you are about to miss getting off at an important exit but you manage to squeeze in at the last second.  It makes me shiver thinking about my good fortune and it makes me paranoid to even share this for the fear of jinxing it, although I don't think anyone even reads this blog! Yes of course, I will give myself some credit for being resilient during tough times and making the best of the opportunities but man, better to be lucky than good as the saying goes. However it would be even better to be lucky AND good.... and I can hope to be so. I will NOT get complacent and take things for granted, but I think I have somewhat of an imposter syndrome which has made me more anxious and less resilient that I used to be. I think part of it also has to do with the fact that I'm at an age now where I can't afford to fuck up again...I don't have the time to make a comeback.  

Ok let's talk markets. In my last post back in early January I said I was expecting some sort of consolidation but if I was going to be wrong it would be that the market simply marches higher relentlessly because of the new all time high effect. Well, I was right about being wrong! When an asset class makes a fresh all time high, especially after not having done so for quite some time, it tends to be be powerful signal leading to further, multiple new highs. That's what happened, but in doing do we got quite overheated from a technical and sentiment perspective much like what happened last summer before that 10% correction. CTAs and other momo trader types were pretty much all in and were even getting away with it for a few weeks, but the market finally cracked after rate cut hopes were once again dashed. Coming into this year there were great hopes for multiple rate cuts to start as early as March. Then they got pushed out to start June and now there's serious concerns that there won't be any rate cuts at all this year. It would seem that the pendulum has swung too far in the opposite direction now.  This latest market decline has CTA puking written all over it. Quite frankly, it's a necessary purging of these jokers and other weak hands who were reluctantly long the market only because momentum underpinned by rate cut hopes. 

The question I ask myself is was the market overheated from a longer term point of view when examining sentiment/positioning? The answer is no. As I said, ST sentiment did indeed get overheated similar to last summer which warrants a correction, but like I also said last summer,  LT sentiment did not reach a bullish extreme which suggests the bull run is not over.  Let's examine some interesting charts I came across which captures sentiment in different ways. 

This charts suggests we have likely hit an intermediate term top at the least, given how prior ones coincided with an upward spike like what we saw. Could it have signaled something more ominous? Perhaps but I don't think so. You can see that over time market peaks have been occurring at progressively higher levels and also, the L/S ratio has risen sharply only after having been in the doldrums for the better part of 2 years and look at how quickly is has declined now after the 5% pullback. 

This recent surge in optimism could suggest a ST/IT top but is not at LT top levels. Like with the previous chart, this burst in optimism is coming after prolonged depressed levels which is what you tend to see in the first half of a bull market advance, not the latter stages. 

 

Margin debt has only recently bottomed out and has had a moderate increase. LT tops have occured after major y-o-y surges as was the case in 2000, 2007 and 2021.

This unique twitter poll  is unconventional measure of sentiment. Sentiment was firmly bearish for better part of 2 years and only recently has switched to the bull camp, but only moderately so. It's still not at bullish extremes found at prior LT tops.    

IPOs have been in the doldrums for 2 years+  which is not what you see near a major market top. Apparently, IPOs are slated to make a comeback in Q2 but even if they do it would take some time before this metric gets overheated.  

Other notable mentions are the BofA bull bear indicator which got as high as 6.8 at the recent market peak and has subsequently dropped back to 5. Prior major market peaks happened when this indicator hit 8 +.  While 6.8 is on the high side, it's not extreme and its coming off a long period where it was at rock bottom lows. AAII sentiment has had multiple weeks of bulls greater than bears but it's coming off a record streak of bears outnumber bulls. Do you see the common theme here with the all the above indicators?  Most of them had a surge in bullishness but it's not extreme and it's coming off of a prolonged period  of deep bearish sentiment. That doesn't scream LT top to me and it's only natural to see bullish sentiment surge like this given that the market has been in a bull market for the past 18 months and has made new all time highs. This bullish surge warrants a correction/consolidation but the evidence suggests we haven't seen bull market killing euphoria yet.   

Chuck your biases and just do the opposite of dumb money

Back in April of last year I wrote this: 

We've been in a rather choppy market for the past 9 months which to me looks like a base.  Bears of course are going to say it looks like a bear flag, but I will say this. If I woke up from a 5 year coma and the first thing I did was look at 5 year chart of the market, I'm pretty sure I would say that it looks like the market is consolidating gains from recent years and is forming a base which will lead to an upside breakout at some point.  That would be an objective viewpoint based solely on market action without any biases or influences from news flow, economists, pundits and what have you. 

I didn't see one single person on twitter or in the entire financial media make an observation along these lines. Instead, all you heard throughout 2023 were complaints about how the market was only being driven by 7 stocks (not entirely true) or warnings about the inverted yield curve, SAHM rule, or what have you. Instead of listening to the market, they resisted it.  I know a lot of people came into 2023 happy to just sit in cash and collect 5%. Ok, great. You made your 5% but you  missed out on 25%. And it wasn;t just the mag 7. There were plenty names in consumer discretionary and elsewhere that did well. European and Japanese stocks also had a great year. Now what will all these folks do if interest rates start getting cut while the market is making new all time highs? At first they will resist because the market is "too high"  but eventually they will do what they always do and find some rationalization to get back into the market.  Rates can't get cut with the market at all time highs you say? Think again. Look at 2019. Look at 1995. Look at the 1980s. Rates cuts aren't necessarily the result of a recession. If  it becomes painfully obvious that inflation has settled down - even in the 3% range rather than the 2% target  - the Fed can't justify keeping rates at 5.5%. Furthermore, if it turns out that 3% becomes the new floor, the Fed may eventually capitulate on their 2% target.  

Getting back to the coma observations; this is not the first time I wrote something like this. I did the same thing in 2011 when the market had a big scare and concluded that using the "waking up from a coma" perspective, it looked like  market may just be having a major pullback after having been so strong during the previous few years.  So, what would my outlook be now if I woke up from a 5 year coma and the first thing I did was look at the chart of the market? I would say that the market trend looks quite strong as it's on the verge of making new all time highs. I would say that based on experience, any asset price that makes a fresh new all time gives a powerful bullish signal which tends to lead to further new all time highs. I would also say though that the market is quite extended above its 200 DMA which leaves it vulnerable to a significant  pullback and/or sideways consolidation phase.. These appear to be 2 conflicting scenarios but not necessarily. It is possible, and likely in my opinion, that we see the latter happen before the former. If we don't get a pullback/consolidation and the market does go on to make all time highs, I suspect it will be a bull trap and not have legs....at least initially. That folks is my unbiased  "waking up from a coma" assessment. If I'm going to be wrong, I will likely be wrong in that the market simply marches higher relentlessly. because the all time high signal is quite powerful.

The market is currently doing what it does best which is frustrating both bull and bears a like by not budging much to the downside despite what appeared to be decent excuses to do so such as hotter than expected CPI. One thing I continue to notice is stubborn put buying. I pointed out in November how this was providing support to the market.  At some point these hedgers/speculators will throw in the towel and perhaps that's when the market will see some meaningful downside.  

I do want to reiterate something I stated in my previous post: Despite the notion of "soft landing", the vast majority of outlooks I have read by strategists and fund managers/are NOT embracing it. You can see it by the price targets, you can hear/read it it in their discussions. This once again sets the stage for the markets to surprise on the upside this year. But unlike last year, we entered this year quite overbought with overextended CTA positioning. The market had been up for rare 9 straight weeks and now that it's stalling you are starting to see people quote ominous stats about how the first 5 days of the year of Jan are negative it bodes ill for the market and if January is negative it's going to likely be a negative year. I for one will not give much consideration to this stat because the market had been so overbought to start it and I say this without having a bias. Quite the opposite actually. I'm taking context into consideration. In January of 2018 the market started off strongly and ended the month up solidly. That would have suggested a great year was in store....we all know how that played out. Again, you had to take context into consideration. Heading into 2018 we had a complacent "global synchronized growth" narrative and signs of froth with weed stocks and BTC going parabolic. 

I am not going to let me guard down, but the odds still favor another positive year based on what I'm seeing from a longer term sentiment perspective. I will show a few more charts next time which shows that the level of speculation/froth still has a ways to go before reaching bull market killing levels.