Relentless ramp

The market has been on a seemingly non-stop run which has even the bulls feeling uncomfortable. I was clearly wrong on expecting a pullback.  Here's my observations on the sentiment front which is fascinating. The option traders/hedgers have fully given up this week so far. The put/call ratio has been very low even when the market had intraday reversals. Usually you would see the put/call ratio perk up when that would happen which would indicate a certain degree of top picking but not this time. Option traders have fully thrown in the towel and have been buying calls relative to puts hand over fist. AAII sentiment has perked up this week with bulls outnumbering bears by 1.5 to 1 ratio. I gotta tell you though, that's not high enough to give a contrarian sell signal given how strong the market has been. It seems like AAII folks have only begrudgingly been turning bullish. Meanwhile equity fund inflows continue to be mind boggling non- existent and that continues to support the LT bullish case. What's it going to take for people to get back into the market?  DOW 50K?  Last time we had a melt up like this was q4 2017 and fund flows were pouring in.

So, we have a weird case here where the market is very overbought, weak longs have been getting in but there's room for even more weak longs to come in as there is plenty of sidelined money that can capitulate and buy in making this market climb relentlessly further still. It's tough to bet on this though because after a parabolic rise typically comes a parabolic fall and if you get caught holding the bag you will get spanked. But you'll also get spanked trying to pick tops in such a market as well which has been the case for many traders as I can tell by the sarcastic, scoffing comments I see on twitter. Best thing to do at this point might be to just watch the show and wait for a better pitch, but I gotta say, benefit of doubt goes to the bulls in the short term until we get more extremes from AAII and the like.

Consensus view is modest optimism for 2020

This is the time of year where I like to read and listen to market forecasts by the "experts" about what's in store for the market in the year to come. From what I gather, I get the sense of modest optimism at best. The expectation is for modest GDP growth and still low bond yields that should see the US 10 year trade in a range from about 1.8% -2.2%. I get the sense that recession fears have dissipated but are not totally gone as there is still lingering worries about trade tensions and political risks. There's also still the strong notion of  the"late cycle" stage of the market we are in and that keeps the herd sensitive to negative events. So although optimism is building, the majority are still watching for that bear market pot to boil and that's contrarian bullish for the market in the LT. In the ST though, there are concerns.

I've seen indicators showing that long exposure from the hedge fund community rapidly increased in December which was the complete opposite of last year when markets were tanking. These clowns are weak longs and I bet were pretty much forced to buy as the market broke out due to FOMO. But mark my words, they are going to bail en masse at some point because deep down, they don't believe in the bull market. That's probably going to cause a 3-5% correction at some point within the first 3 months of the year if I had to guess. In my last post I mentioned that I expected to see the market cool off, but it hasn't yet probably because of continued top picking behavior as evident from the ST trader types and hedgers in the options market. I had thought that maybe they had given up but it turned out it was only for a day. At some point though,  they will give up for good and when they do the market will be ripe for a rug pull to clean out the weak longs that appear to be in the market right now. But this is all ST talk. LT the conditions that I expect to see when the stock market is at the ultimate top will probably look like this:

1. The global economy will appear to be in great shape or at least well on the mend
2. The investing public will have returned en masse as evident by fund flows and other excess such as a large spike in margin debt will be evident. 
3. There will be a popular view that recessions may be a thing of the past and therefore the bull market can continue indefinitely.
4. Stock market bears will be chastised and ridiculed.

We are clearly not at this point yet. 

Some bear capitulation...pullback now?

After taking it on the chin day after day trying to top tick the market for the past 2 weeks or so, the bearishly inclined trading community (which makes up the majority of traders today in my opinion) may have temporarily thrown in the towel. You can see this today as evident by the very low put/call ratio. Mind you, this is only one day....we could very well see these clowns pile into puts again on the first hint of weakness. However, I have to say that the charts look extended here when you look at how far the market is above the 200 DMA and the parabolic rise as of late. This suggests a breather at the very least is forthcoming. We're also starting to see "melt up" chatter which in the recent past has been a pretty good contrarian sign of  a ST top. The trading community is basically throwing their arms up in the air saying "you can't stop this market because of the fed" which means that even though they may have given up trying to short the market they still don't believe in it. That's been the story for pretty much the last 10 years.

So, assuming that lots of bears have temporarily given up, the market has lost a source of fuel right at a time when it's looking a bit parabolic and overbought.  As such, I expect to see the market cool off in the near future. For how long or how deep I don't have a good feel at this point.

But don't get me wrong....the underlying skepticism of the market is still there and we aren't seeing the type of exuberance that we saw in late 2017-early 2018. If the market drops 2-3% I expect to see pessimism ramp up again.

I expect pullbacks to be modest for now

Ok, so we got the "phase 1" of the trade deal signed which lifts some of the "uncertainty" from the market. I've said it before, this trade war is a fugazi. It's just a distraction/narrative for market participants to pay attention to. Ultimately, it's not going to have a material impact on the economy no matter how it's settled. Major downturns are not caused by this type of silliness. They are caused when a material underpinning of the economy unravels and spills over into other sectors. The US was never overly dependent on China, it's the other way around. Yes, the trade drama can cause significant ST noise but it's all just noise. Another thing that can cause a significant downturn in the market (but not collapse) is when you get too much enthusiasm from the crowd. This creates an overcrowded long exposure making the market vulnerable to a rug pull. A good example was the 1987 and 2018 declines whereby sentiment got overheated and the market had a serious rout with the economy still relatively fine i.e. not in recession.

I would speculate right now that we are in a position where a lot of "pros" and retail as well, are caught flat footed because they've been positioned rather defensively all year. The pros in particular are probably begging for a big pullback, but in such a situation were so many people are caught leaning the wrong way, it doesn't seem likely there will be one. I'm also noticing ST trader types and/or hedgers relentlessly trying to top tick the market because anytime the market shows even the slightest hint of weakness the put/call ratio spikes to 1 or thereabouts. This is creating yet another layer of support as these traders get their fingers burned over and over. You can see it the intraday charts. You can actually see a finger-like pattern in the chart which is indicative of shorts getting squeezed and stopped out. Maybe we''ll see a swift change in attitude shortly but until we do, don't hold your breath for a big pullback just yet in my opinion.

The main purpose of the stock market is to make fools of as many men as possible

In these politically correct times I suppose I should change the title of this post to "the main purpose of the stock market is to make fools of as many people as possible" but fuck being politically correct, the original title stands. This phrase which is the motto of my blog was coined by Bernard Baruch, a US business man of the early 1900's. It's the most accurate description of the stock market that I can think of. The stock market is seldom obvious, seldom does what the majority expect it to do and the reason why is because the market is already aware of and therefore reflective of common expectations, views, fears, ect. So, if you want to "beat" the market you have to position yourself for how those expectations will be changing in the future.

Throughout this bull run that began in 2009 there has been no shortage of worries, no shortage of calls from "experts" warning us about immanent doom. Where are the "permabulls" who are calling for outlandish upside like Dow 30,000  in the late 90s? There are none to speak of. Yes, you can find bulls but they are relatively modest and few in number compared to the doom and gloomers.

I'm in the advisory business and all I've been hearing since last year is this "late cycle" narrative from the wholesalers I deal with. Everyone's on alert for the next downturn like I've never seen before and the "pros" have been positioning themselves accordingly.   The inversion of the yield curve is what really got everyone going since it has historically signaled an immanent recession. I'm not going to divulge as to whether the yield curve signal was as strong or meaningful as in the previous instances due to global distortions. What is key to note is the frenzy of attention the inversion garnered as a harbinger of doom whereas in the past, the yield curve inversion was not as nearly paid attention to. It speaks to the underlying, deep rooted pessimism that still lingers from the 2008 crash. If we go by the motto of this blog, then we are probably not in the late cycle. It would suggest that the cycle still has at least 2 more years to go. When was the last time the investment "pros" as a whole correctly positioned themselves for "late cycle"? The answer is never. The 2008 collapse was a "surprise" just like every other major downturn. Another great example of a surprise was the collapse of oil prices in 2014-2015. How many "experts" were calling for "late cycle" oil prior to that collapse? The answer is 0.  Literally 0.

My point here is that the time to really get worried about the long term is when there are no worries! We saw that type of no worries feeling in late 2017- early 2018 when "global synchronized growth" was the common mantra and retail was pouring money into the market. This ultimately led to a 20% correction which wiped out the optimism reverting it back to the pessimism that had been persisting for years prior to it. 2019 was characterized by fears of an immanent recession which never came to pass. Now we are starting to see green shoots of a rebound as Global PMIs have been turning up, so called "progress" on the trade war has happened and the Fed cutting rates appearing to be on hold for the foreseeable future. Yet this budding optimism, if you want to call it that, is still quite fragile because there's still quite the concern about what would go wrong on the trade war front, the repo market,  politics, ect. The bottom line here is that there is still plenty of room for upside re-rating of expectations which would send the market notably higher in 2020. What the market does in the next few weeks is a tough call as it typically is.

The Rodney Dangerfield market - it still gets no respect

I know it's been a while since my last post. I would have liked to have posted sooner but I've been busy. Since my last post the market dipped as I had expected but it was a relatively minor dip and it wasn't too long before the market had a major rally and hit fresh all time highs, the main reasons of which appear to be the notion that the Fed has hinted that it will be on hold for some time,  trade "progress" is being made with China and jobs data suggesting that the US economy is not heading into a recession as many have been fearing all year long. So, does this mean that investors in general are finally embracing the market showing unbridled optimism? Hell no. All I see so far is pessimism unwinding and rather reluctantly so. We are still seeing no meaningful fund inflows. Aside from Trump, very few people in the media  have been celebrating/embracing this upside breakout to new highs. And I have not seen one market bear, not fucking one of these miserable, self righteous clowns come out and say "you know what, I was wrong and I've been wrong for so long that it's so embarrassing". I'm talking about clowns like Gundlach, Schiff, zerohedge and the rest of them. I find it hysterical that these jokers are still given all the attention they get over the years despite being so comically wrong over and over and over....and it does not matter if the market were to make a major top today, these guys can't come out and say that they were right but early. No fucking way, not when you've been bearish from DAY 1 of this bull market. I wonder how my millions have been lost or foregone by their followers. Do yourself a favor and NEVER listen to any of these clowns again if you have been. This is not to say never be bearish, but just don't follow these jokers. They will poison your mind. It's funny how I see some sarcastic tweets that say things like "thanks for QE and easy money the market is at new highs".  My response to that would be this....if you knew QE and easy money would bring the market to new highs WHY THE FUCK DID YOU NOT TAKE ADVANTAGE OF IT and then thank the Fed? Instead, you moan and complained about it! That's the same as spotting $100 on the street and not picking it up and then complaining the next day that you don't have $100! The excuses from the pessimists are pathetic. They are so wrapped up in their loser dogma and negativity.

The message I've been preaching here for years is that until we see evidence which strong suggests investors in general have FULLY embraced the bull market, the bull market will continue. Until we reach that point, there will be corrections, there will be scary moments but the benefit of the doubt has to go to the bulls  I realize this can be very difficult to believe in at times, I myself have had serious doubts at times. It's easy to doubt yourself especially during down days and negative headlines but this has been the correct way to approach the market. And if you're watching the market day by day, tick by tick it makes it even harder to follow this approach. It's also very difficult to correctly time every ST wiggle in the market. Now having said that,  you know I can't resist making a ST call on the market at times so allow me to indulge. The market would appear due for a least a bit of a consolidation here but I gotta tell you, everyone seems to making this call which to me means that any pullback won't be that deep at this time. Whenever you see ST trader types show complacency such as buying a lot of calls relative to puts, at the first hint of weakness you see them rapidly embrace the bear side again piling into puts. This is happening now as the market has been rolling over a bit here.

The only time we saw people in general show any love for the market for a sustained period of time was q4 of 2017 until Feb 2018 which was evident by heavy inflows to equity funds and anecdotal commentary from the financial media with their "global synchronized growth" mantra. At that time I was warning about this. By the time we reached the end of 2018, that optimism was wiped out completely and was replaced with pessimism. At best, we are at the point of neutrality now. We will see a return to optimism once it crystal  clear that the global economy is on the rise, political uncertainty is low  and all is well again, but at that point the market would probably be 15-20% higher. I said here before that you have to skate to where the puck is going to be not where it is now. If you wait for everything to be hunky dory you will miss out  most of the gains or even worse get in near the point where things start to head for the worse.

Let's talk about early 2018 for a second. At the time I was debating with myself whether the optimism  that was evident was a sign that the bull market peak was immanent.  I concluded that the market would probably have a severe correction but that the bull market could still be in tact because we didn't really see optimism turn to euphoria. You could argue that the bubble in bitcoin and cannabis stocks were symptoms of euphoria but they ware isolated pockets of the market since they didn't garner large scale institutional ownership. When you look at what caused the last few recessions it was the result of a major sector in the economy going bust which created a crisis that spilled over to the broad economy, that  can only happen if there is large scale exposure i.e. institutional ownership of the sector in crisis. We saw that happen with MBS in 2008 and the technology sector in 2000. Bitcoin and weed stocks were largely avoided by institutional investors/firms and so that's why I had hope that there would not be a major economic fallout when their bubbles burst. There is this notion that the next crisis could be from the corporate bond market of which there is a lot of low credit credit quality bonds that have been issued in recent years. Maybe that could be it, but I would suspect that until interest rates have a very notable rise, there's no need to worry about that for now.

The bottom line is that bull markets climb a wall of worry. So long as there are enough people worried out there it keeps expectations low and guards up which makes downturns in the market likely to be just temporary corrections. It's impossible to always know the timing of the corrections, how deep they will go and how long they last. The market is simply too random in the ST.  However, you still need to pick your spots. It's not wise to chase a market that has gone up in a straight line because after all, there is always going to be uncertainty. This is why I often use the words "likely" or "probably" because you can't know for sure what the market is going to do but the longer the time frame, the less "noise" plays a factor and so you should be making most of your bets on longer term time frames with strong conviction. It's also OK to not have any positions when there's no decent setups/entry points or when your conviction level is not strong either way. The market will always be there when you wake up the next morning.

Beware of bull trap

This move up we've seen out of the "trading range" doesn't feel right. Pull/call ratios have collapsed and bond yields have spiked quite a bit. I smell a trap...it feels too easy.  I've been mentioning lately how I felt that bonds yields were close to  a medium or long term bottom and so it's not too surprising to me to see this action but as I've said before, if you look at when notable corrections began, it coincided after a period of rising bond yields. Now mind you, one can make the case that since bond yields had declined so much, there could be plenty more unwind (rise) in bond yields before the market runs into trouble. That could very well be the case, however, it's all about risk reward. The risk/reward to go long when the market is overbought, put/call ratios have collapsed and bond yields have spike is simply not good. That's not necessarily an invitation to go short either but for a small ST downside play it's looking tempting. From a longer term perspective, there is still plenty of potential bullish fuel as fund flows continue to show cautiousness. There was a modest inflow last week which suggests maybe some folks are starting to poke their heads out from their hole..maybe.just in time for Mr. Market to whack it back down one more time before the real upside breakout occurs. I might end up being too cute here getting a little too fixated on the ST, but again, it's about risk/reward and I just don't like it here on the long side at this moment.