It's been a while and as often the case when I don't post for a while, a lot has happened since. In the middle east we got a cease fire that lasted for a 30 or so days before fighting started again. Trump is angry at Iran because he said they lied to him. First of all, that's pot calling kettle black, second of all what the fuck did you expect? As I pointed out in my April post, so long as Iran is able to, they will use deception and manipulation as much as possible to achieve their objectives. Diplomacy will not work unless they really have no choice and that's going to require that they get crippled significantly more. The only possibility it can work without inflicting more damage is if there is some sort of a regime change. The IRGC's strategy is an obvious one....keep holding out for a long as possible, by firing on ships, making false promises of diplomacy and wait for the TACO as US mid-terms approach. Here's the thing thought this strategy can backfire on Iran. The narrative is that Iran was backed into corner and they lashed out accordingly....well, Trump is now being backed into a corner. He must know that as it stands now he's all but lost the midterms, so why not just do as much damage as possible before he no longer has the ability to do so? What's there more to lose for him at this point?
I hear lots of dooming from folks such as Peter Zeihan Eric Nutal about an immanent oi price super spike because of the closure of the strait of Hormuz and now the threat of the Bab-el strait. I'm not going to argue with the alarming situation that exists but annd I'm certainty nowhere close to having the knowledge of Peter and Eric but I'll tell who has more...the market itself. Once again, like in April, futures markets are telling you that there's no such super spike incoming as forward looking contracts are trading at discounts to spot prices. Oil bulls will respond that the market is complacent or in denial. This is what they felt in April too. Once again, I'll say perhaps that's true...but as I stated last time when oil was over $100 the futures markets are usually right about pricing in significant discounts or premiums to the current spot price of a commodity. These markets reflect the collective wisdom of commodity producers, users and investors/speculators which as a whole have deep insights and knowledge. Do you think they aren't aware of current conditions in the middle East? The market is saying a resounding NO to there being an immanent super spike in oil as things stand right now. Given the message of the market I say that for there to be a super spike in oil we would need to see a new and very significant development that is very bullish for oil that very few or nobody sees coming. Hormuz and Bab-el straight issues are old news, but I'd be lying if I said that I'm not worried about there being a major spike in oil...but that's my emotions talking.
OK. let's switch gears and discuss the markets. Since July, I've seen so many red flags of an immanent major market peak. Immanent doesn't necessarily mean next week but rather within in the next few months. We have margin debt levels, market vane, AAII equity allocation, leveraged ETFs all in red line territory and all of which proceeded a major market peak or serious correction in the 10-20% range. There's increasing talk/pressure for a rate hike in the US with a 60% probability of it happening at the Sept meeting. Lots of talk about poor market breadth recently which is reflected in CNN fear/greed index. Despite the market not that far below all time highs it's showing a level of 42 which is in the mild fear zone. The reason for this is because of the breath components that make up this indicator are showing weakness. I recall similar action happened in late 2024 which was an early warning sign of a top which preceded the 20% correction triggered by Trump's liberation day tariffs in April 2025.
So, all in all it would appear to me that the market is overextended and in need of a reset at the very least...it's always tough to pinpoint exactly when that is going to happen. Could it end up being something more ominous, i.e. a major bull market peak? Perhaps but just like every other time I was cautious on the market like this because of overheated sentiment/positioning, we haven't seen true euphoria in the market. What I mean by this is the lack of a narrative that there's nothing but blue skies ahead coupled with a flood of poor quality IPOs. The major IPOs of Space X and soon to be coming Anthropic followed by Open AI in early 2027 (likely) are definitely a concern from a contrarian point of view as such IPOs tend to happen to take advantage of high valuations and bullish sentiment in the space. but these are not poor quality IPOs in the sense of the companies themselves as they are leaders in the space. Back in the dot com bubble days we saw a flood of IPOs of junk companies like e-toys and pets.com. We haven't seen that and so this IPO surge could end up marking a correction followed by a digestion/consolidation phase similar to what happened in 2011 and 2022.
From a narrative point of view, there's still no shortage of people concerned about Trump's negative impact on the global economy. I had a client of mine recently mention her concern of the AI bubble. This client doesn't follow markets much and would be considered unsophisticated and so for her to mention AI bubble means she probably heard or read about that from mainstream media which means it's a widely known concern. Last year at this time there was a lot of chatter about an AI bubble which I had noted. It would appear that this concern is still there. Generally speaking, you need to fade widely held narratives as they are already priced in the market, but as I've mentioned the market has an overheated positioning condition in place and so what this all likely means is that although the market is vulnerable to significant correction of 10-20% it would likely not mark the end of the bull market. Instead it would likely result in a the type of sentiment reset that look place in other such corrections because that underlying skepticism is still there.
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