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...