Worst start since 1970

In January I made a post titled "2022 the year of the hangover". It's the worst start to a year since 1970. Only 2 other years, 1962 and 1932 have been worse (and basically a tie with 1940). Bonds have also had the worst start to a year ever.  It's been an utter shit show.  There was only one sector you could have hid in this year which was commodities and that too now has been taken to the woodshed in a major way the past couple of months with respective equities down 30-50% from their peaks. You can see that the damage is across the entire spectrum of commodities including wheat which is supposed to be in short supply due to the war (I read that Australia and Brazil are going to have big harvests this year though). 

Meanwhile, inflation expectations implied by the bond market have dropped sharply as per the 5 year break even spreads. The market is now pricing in an average inflation rate of 2.7% over the next 5 years. 

The evidence is certainly mounting that inflation has peaked. So, is the Fed going to take any of this into account or will they carry on looking in the rear view mirror with their ridiculous plan of hikes to infinity? The fact that the Fed under Powel provides on open book with expected rate decisions for the next 6-12 months is comical. The Fed has a poor track record of predicting inflation as the future often proves to be too uncertain to make accurate predictions. The Fed thinks that by keeping an open playbook it will create less market uncertainty but I believe doing this creates a false sense of certainty which leads to upheaval if the Fed realizes they blundered and have to rapidly change course which is often the case. Last year at around this time the Fed said they weren't going to raise rates until the latter part of 2022 and it would only be small. You can see how such an expectation can lead to complacency with businesses and consumers when in comes to their borrowing and spending decisions. Instead what the Fed needs to do is stop being so explicit and open with their intentions and admit that they can't make long term forecasts accurately enough. Keep the market guessing and on guard to a certain a degree so that expectations don't get too extreme one way or the other.  Powel's Fed has been terrible at setting rates. The only glimmer of hope I see that they don't fuck up yet again is that so many people are concerned that they will fuck up that Powell and the Fed are well aware of this. Maybe that will make them more cognizant of the forward looking indicators I posted and they will announce some sort of pivot in July. 

If a Fed pivot does happen, it would result in a relief rally but is it too late now to save the economy from going into a deep recession? We are no doubt in a recession right now in the technical sense.  The damage of this rising rate environment may have been too been much even if rates have peaked. It could very well be the case that too many dominoes have already fallen. And it's not all just interest rate issues. The deficit has been shrinking which is a detractor for economic growth. At the end of the day the market cares about earnings and if they are slated to contract in a major way, forget about it. We will see SPX 3000 before all is said and done. 

Bear markets will not make it easy for pessimists to make money. There are vicious counter trend rallies within them to shake them out and suck in hopeful longs and they usually happen when negativity becomes acute and lots of bearish bets are being made at a time when many would be longs are on the sidelines too scared to jump in. I believe we are in a such a condition. All it takes is a spark to light the fuse unless the wheels simply start falling off fast and furiously before it can happen. 

Let's now talk about sentiment and more about what I believe are missing links to declare that we have seen true capitulation. Positioning in AAII investors is the first one. This has proven to be the best indication of lack of capitulation from day 1.  The recent allocation was released today and it shows that equity exposure dropped down only to 64.65%.  At the peak of the market in Nov 2021 exposure was at 71.4%. Given that this has been one of the worst years in history YTD, the  behavior of AAII investors continue to show, as has been the case all year,  only a grudging amount of  retreat from the market which is indicative of a bear market that has not run its course. Back at peak of the market in 2018 exposure was at 72%, and by the end of year whereby the market had declined 20% from the peak, exposure dropped to 62.4%. At the very least I'm expecting exposure to get to 60% for me to have any confidence that the worst may be over, but that's only in the event that what we seeing this year will turn out to be a mild bear market year as was the case in 2018 and 2011. If we are in a major bear market then there's a long way to go before we have seen true capitulation. At the lows of 2003 and 2009 equity exposure was 46% and 41% respectively. 

The other major concern I have is fund flows which like AAII, continues to show only grudging amounts of capitulation. In recent weeks we've seen what I would characterize as mild to moderate outflows given the damage done to the markets. We have seen $30 Billion outflow in the past 3 weeks which is good but not enough to signal an all clear from a LT perspective especially give all the inflows earlier this year. One thing I did notice though is that there was a outflow last week when the market had a rally and so that's actually a positive from a contrarian perspective in the ST. 

Other concerns I have which suggest this bear market has not run its full course is bitcoin still at 20K.  When bubbles burst, its pretty much a lock to see a 90%+ collapse from the peak. BTC was the biggest bubble I've seen since the dot com days. The hysteria, the scams, the leverage, the amount of dumb money retail and institutional participation, the super bowl indicator - all of this says that 90% + drop is inevitable. Now, it's possible that the market and BTC decouple like it did after it collapsed in 2018 but its less likely given how widespread its reach was this time around. For me, BTC and the meme stocks are barometers  of speculation and although they have come off a lot from heir highs, they still show signs of life anytime the markets do and they certainly can and likely will go a lot lower in due time. It can take a long time for traders/investors to move on from the types of stocks that worked well in the previous cycle. This was the case after the tech bubble bursting as well and so many of the junk stocks that eventually crashed  90% + many of which going to 0.  It took years for traders to give up playing them. Look at weed stocks for a modern day example as to what crypto and meme stocks will end up looking like in the long term. 

Finally, the last thing bothering me is the low VIX and the lack of capitulation its signaling. I've heard it may be due to its "microstructure" as I've seen someone put it., but I'm not trusting that.  

So, all in all you can make the case that although we have seen excesses having been purged from the market, its still not enough. That does not mean the market can't have a strong rebound for several weeks. SPX 4000-4200 is quite doable if a bear market rally takes hold due to a Fed pivot or whatever.  

I sincerely hope that my longer term negativity will prove to be misplaced. I really hope we can somehow muddle through this year.  Like I said, many times,  I am trying to keep an open mind but I have to say that deep down I feel that we're fucked. 

Weekend thoughts

 Since my last post we've had a market bounce and there's been some notable developments.  Commodity stocks have sold off hard. XLE, this year's top sector YTD has taken quite a tumble. A lot of hot money had been piling into this sector. Prior to this tumble, the monthly BOA global fund manager positioning report was showing a massive overweight in commodities and respective underweight in tech. Cash was also massively overweight. Obviously this was a wrong way bet for the ST at least. I've been noting evidence of the rapid shift out of tech for months now. We could very well be at the point where its washed out on a medium term basis and perhaps long term basis. There has been a complete unwind of once high flying stocks like SHOP and ZM as they have gone so far as to  hit COVID bear market lows. That would appear to be a big overshoot to the downside. For about a month or so, these types of stocks a.k.a the unprofitable/high p/e tech stocks,  have quietly been showing relatively strength. It's still far too early to declare a change in trend but if it continues, it would be encouraging as these type of stocks were the first to go down. Probably the main reason these stocks are showing some signs of life is the recent decline in commodity prices and other inflation pressures. Chinese freight rates for instance, have rolled over. Housing prices have rolled over. It's too early to declare the decline in commodity prices as a major rollover just yet. It could very well just be a pullback due to over-crowded longs getting rug pulled. I suspect the Fed will probably not make much of these emerging signs of cooling inflation just yet and hike again in July, but they need to signal that they are aware of them and will not simply react to lagging indicators. 

The above was published mid June. When you see such things on the front page of a mainstream newspaper it's a strong contrarian signal. At the very least it suggested a ST market rebound as sentiment is extremely negative. The University of Michigan consumer confidence index just registered an all time record low - even worse that than during 2008 financial crisis. Again, such an indicator has strong contrarian implications as it signals extreme pessimism and history shows future longer terms returns to be strong. The one time it didn't work so well was in 2008 when it hit an extreme in June of that year of 56, rebounded to 70 by September only before tanking again to 55 in November for obvious reasons. The current reading is 50 which as previously mentioned, is a record low. Taking this into account along with other indicators both anecdotal and quantifiable such as the BOA bull bear indictor, it's signaling that at least a ST market bottom is immanent or has been put in. Of course, there's good reasons to believe that that we aren't near a LT bottom but we need to keep an open mind.  I was looking back at the 2011 bear market lows and at the time there were recession fears and major concerns about a European debt crisis which was going to lead us to the next phase of the financial crisis. Things certainly looked dire but that's why it's hard to buy at bottoms because it always feels that things will only get worse. 

 In recent years bulls were able to make the case of TINA - there is no alternative. Well, now there is. GIC rates in Canada have not been this good since 2000! You can get a 5 year GIC today at 5%. That's pretty damn good. Yes, this is a negative real return at the moment but you would expect inflation to subside in the years ahead. Even if it averages 3% for the next 5 years that's still a pretty good return for a 100% risk free investment. How much of a deterrent is this to equity markets? It's got to count for something. The only way I see a bullish resolution to this is if GIC rates peak and start coming down notably but that's not happening as they keep climbing making fresh highs daily. It's hard to get bullish on the market longer term when risk free alternatives are now attractive and getting more attractive by the day. The high interest rate environment for me, is the biggest bearish factor for the market - whether it be high mortgage rates\choking off housing or high GIC rates providing an attractive alternative. If the market sniffs out that rates are peaking at a point where it's not too late (we avoid a painful recession) we can get a bullish resolution and we'll look back to this period as a major growth scare with a healthy cleansing of excesses. That's certainly not a given by any means. There were enough signals and red flags to suggest that a major bear market has began. But again, that's not a lock either. I'm trying my best to keep an open mind as to how this is going to turn out. I think though that if there's going to be a bullish resolution to this, the market is not simply going to do a V shape upwards move from here. It would likely chop for several weeks.  As usual, I will take my cues from the market and the indicators and adjust my outlook accordingly.  As of now, I suspect it will be treacherous trading for both bulls and bears. The easy money of last week's bounce has been made. With bond yields and oil prices rebounding as I type this, it's going to serve as a headwind again. 

Miserable market

I wanted to make this post sooner but I've been busy. In my previous post I ended off by saying that the market was ST overbought and to watch and see if the market could manage to find a way to not fall apart as it did prior times this year when in a similar condition. Well, it failed the test miserably. A hotter than expected CPI report sent the market on its way to new lows and sealed the deal for a 75bps hike. There's clear signs of slowing growth ahead and we now run the high risk of the Fed hiking rates by looking in the rear view mirror rather than what lies ahead. Clearly they must be seeing that housing has stopped dead in its tracks and that's the main thing that Fed rate hikes will impact. They've done enough. Yet the rhetoric from the Fed is that they will continue to raise rates throughout the remainder of the year, yet they say they are not trying to create a recession. That's exactly what they will do if they continue on this path and it may already be too late.  There needs to be a pivot soon. After the July meeting they should announce that they may stop further hikes as there are clear  signs of cooling in the economy. They should  say "we don't want to make our decision on interest rate policy entirely based on the latest rear view mirror CPI data while there are clear signs of economic cooling and therefore abating inflation pressures ahead". Don't hold your breath for this because the Fed does in fact have the reputation of making decisions by acting upon rear view mirror data which means they are only gong to pivot when it's too late and the economy is well on its way heading towards the shitter. Could it be different this time? Could they see the writing on the wall and be proactive rather than reactive?  The Fed did say that that they don't want to induce a recession but that's only going to happen if they look at forward looking data.  I won't give Powell the benefit of the doubt. With the mid term election coming you would expect some sort of policy responses to fight inflation whether it be a gas tax holiday, removal of Chinese tariffs, US oil export ban and/or incentivizing more US drilling for oil. These measures may turn out to be fruitless but it could spark a temporary rally. 

I also mentioned last post lingering doubts I had about the market. Despite indicators showing that there's a extreme amount of pessimism there are some holdouts which suggests otherwise. First off is  fund flows. It continues to show lack of capitulation and FOMO anytime the market stages a rally. Last week there was a $16 Billion outflow which is good (to signal pessimism) but given the damage of the market year to date we should be seeing far greater outflows. Another lack of capitulation indicator is positioning from AAII. Although they have been showing record bearish sentiment, it's not being reflected in how they are positioned as they are 67% in equities which is still high. It needs to drop off the low 60's at the very least which is what it did at the end of 2018 after the market had dropped 20% from it's peak. .At the COVID low it got to 55% however, that was after a 35% one month drop in the market and so 55% shouldn't be a target.  Let's see how that changes when their positioning is released at end of month. The other thing that's bothering me is bitcoin. The fact that it was still lingering at 30K told me the excesses and silliness of 2021 are not fully washed out yet. It has since tanked getting as low as about $17.6K  and now back above $20K. All the shenanigans and leverage that have underpinned cyrpto are unravelling. From a pure ST trading perspective, there was enough negativity and extreme selling pressure to warrant a bounce but there's still no shortage of people out there like that smug self-righteous clown Kevin O'Leary and that idiot President of El Salvador who are claiming what a great opportunity it is to buy more. I remember back in 2017 when bitcoin was under $5K how people were talking about it. That's were its ultimately heading and then lower still. Just look at the weed stock mania and the dot com mania to see where bitcoin is ultimately heading. There will be interim rallies no doubt, some of which could be quite vicious.  Just how much is the market and/or economy tied to crypto? There has been a pretty strong correlation of crypto and the NASDAQ for quite some time now but in the last few weeks has decoupled. That's a market positive, but have we really felt the fallout from crypto yet? I don't think we have. Layoffs in the crypto space have been announced. There's got to be quite a few hedge funds that invest in crypto which also invest in equities.

Switching back to market sentiment. That BOA bull-bear indicator I showed before hit 0. That's literally as low at it gets. I remember seeing it at 0 in April 2020, however, I'm not sure if it was 0 in the midst of the carnage in March 2020 and hence early, but even if it was, it was a great long term buy signal . In hindsight we can say that the COVID crash was a major correction in a bull market just like the 1987 crash as it was rather short lived. Until proven otherwise, we have to operate in bear market parameters given that the market has been in a downtrend for several months. In a bear market, negative sentiment can be tolerated for quite some time before resulting in an upside corrective move, just like how in bull markets bullish sentiment can be tolerated for quite some time before a downside correction happens. This is why a lot of the contrary indicators haven't worked as well as before. Only when you get prolonged extremes will it work and it may only result in a ST corrective move. That's where we could be right now. There's enough negativity to suggest a multi-week rally is in the cards.  Bulls  will say that that so much negativity is priced into the market and so we must be near the ultimate bottom. We've been hearing the "it's all price in" argument all year. It's been more wishful thinking than anything. Certainly, there's a high degree of negativity priced in and we are at a point now where just the slightest glimmer of good new could spark a major rebound but as I've been saying all year, you can't give the benefit of the doubt to the bulls just yet. Although there's high negativity, its justified. The spike in interest rates and inflation have resulted in economic damage that we have still not yet fully felt. Again, I understand that the market has priced in this to a certain degree but we were just at 52 week lows last week. That disproves that all the bad new is priced in. One thing I've noticed which is showing a glimmer of hope is how the NASDAQ's advance/decline ratio did not make a lower low last week and is showing positive  divergence.  The NASDAQ was the leader on the downside and it needs to show leadership to the upside. Meanwhile the energy sector has gotten hammered recently. The market desperately needs energy prices and rates to cool off. Oil may have made a double top. The bearish interpretation of this is that it indicates significant slowing global growth which is going to accelerate. The bullish interpretation is that this could signal a much needed relief in  inflation and perhaps the the oil market is becoming better supplied which would give the Fed more impetus to back off should energy prices continue to slide. I admit it's way too early and perhaps naïve to suggest this could be the case.

The bottom line here is this. There's enough to be worried about if you're either bullish or bearish in the ST. In the ST the market is once again oversold and sentiment is quite negative (with some holdouts)  however the bears have macro on their side. Things are incrementally going to get worse economically before they get better. Fundamentals trump sentiment in the medium and long term and there's a real risk that the wheels can fall off quickly because of some sort of blow up.  If that happens we see can see mounting layoffs and collapsing earnings resulting in much lower lows for the market. The word "recession" is on everyone's lips and quite frankly, for good reason.  For the market to start looking beyond the valley and ignore any upcoming bad news it needs to sense an endgame to this rising rate cycle at a point where it's not too late for us to avoid a painful recession. It's possible we can get a technical recession without the accompanying layoffs and earning collapse but do you want to hold your breath for that? I don't. That's not the norm. 

Is it possible for us to look back at this point one year from now and say "that was the bottom""? Yes it is, but it's also just as possible for us to look back to say that we were at a point where things were about to get really bad, maybe not tomorrow but by the end of summer or early fall.  There's definitely the potential for this when you look at the excesses of housing which right now is hurting. 

Everyone is calling this a bear market

We've had a good bounce since late May as I suspected could happen. I mentioned that in the 2001 and 2008 bear market years there was a spring/summer rally which was the last hurrah before the most damaging leg of the bear market took place later on in the fall. Is this what we are setting up for? My last post was titled "too many indicators suggest major bear market". The following are some reasons why this may be the wrong assessment. Typically, big bear markets start off as slowly trending down for several weeks and it's in the final stages when things really accelerate to the downside and you can get 3%+ gut wrenching daily declines. We've seen that type of scary downside action take place which would suggest that this "bear market" is close to its end not its beginning. Everyone is pretty much calling this a bear market now and many are bracing for a recession. Elon Musk today said he has a "super bad feeling about the economy". There's plenty of obvious reasons for concern, but could it be now that it's too obvious and that expectations now are too low?  Just prior to the low analysts and strategists were tripping over themselves to lower price targets and earnings expectations.  Low expectations are the bricks that can create a wall of worry. I'm not sure expectations have been lowered enough but they are heading in the right direction to create conditions for upside surprises later on.  

The following charts are contrary sentiment indicators which all suggest that this "bear market" could actually turn out to be a major correction and that it's now over or close to being over. 

Now, I know it seems hard to fathom that the market could have hit a major bottom but you know what? That's what a bottom usually entails. At a bottom things look ugly and hopeless. Someone who's bearish would probably respond by saying "you think this is ugly? Wait until you see what's coming!" To that I would say fair point. Things could indeed get a lot uglier, but they could also get better...or at the very least not be as bad as what everyone's bracing for and that would be good enough for the market to go up. Take a look back at the lows of  2011, 2016, 2018 and 2020. Most people were expecting lower lows. The charts I posted above all indicate expectations/sentiment is at a pessimistic extreme. I love that chart about bear market rally articles. It proves that pretty much everyone is calling this a bear market and that's a strong contrary indicator.  At the very least, these charts support the notion of a multi-week counter trend rally, and at face value it supports the notion of a major bottom. Does that last statement make you hot under the collar?  Did you shout "no fucking way" If you did then maybe I'm on to something. I'll say this...if I just woke up from a 3 year coma and was given those 5 charts I would characterize the market as a table pounding buy. But of course, I like everyone else am cringing about record high gasoline prices, sharply rising interest rates and war fears. 

Let's see how this is going to play out. In the ST the market is overbought but ST sentiment indicators, NAAIM  in particular, has lots of room to rise before getting overheated. If the market can manage to not fall apart while ST overbought it will have been the first time this has happened all year and would set the stage for at least a multi-week IT rally and possibly something more. 

Despite all the contrary indicators suggesting a low has been put in, I have some lingering doubts aside from the obvious ones (inflation, rising rates, war) which I''ll discuss in an upcoming post shortly.

  

 

 

Too many indicators suggest major bear market

April was horrific and May so far hasn't been much better as the market has been down 6 weeks in a row.  At its lowest point last week the SPX was down 20% YTD and we are off to the worst start in market history. Just brutal. Volatility studies are showing that the action in the market we have been seeing was what we saw in 2001 and 2008 which were terrible years, indicative of a big bear market and recession.  Sentiment is negative enough  and the market is oversold enough to get some short term relief but the macro situation is firmly bearish with no hope  unless there is some miracle in Ukraine. Some measures of inflation appear to be peaking but energy prices have not. Gas prices hit over $2/liter this past weekend and it's going to go up even more.  The sharp spike in LT interest rates have resulted in LT mortgage rates spiking in kind and this has stopped housing dead in its tracks. I live in the GTA and prices have declined at least 10% from the peak. The Fed is determined to stop inflation by targeting demand even though they admit that the main causes of inflation have been supply shocks due to lockdowns and the war. It would appear that they are OK with creating a recession to achieve their goal. Rising energy costs and slumping housing must at some point create a softening of consumption right at the point where companies have rebuilt inventories for a lot of goods.  That could end up being a toxic situation and by the end of the year we could end up being worried about DEFLATION rather than inflation. 

The whole "the market has priced in the negatives" argument has turned out to be bogus otherwise we would not be trading near 52 week lows YTD and the damage would have been less. In 2001 and in 2008 the market was able to stage a multi-week rally in the spring/summer. That was the last chance to get out before the serious damage was about the begin, when earnings were heading sharply lower and ensuing massive lay-offs began.  Are we going to get that one last rebound or are we simply going to keep sliding? Again, there's enough indicators that suggest bears are pressing a lot and so we could get the former but that's certainly not a given. 

So how bad could it possibly get? Really bad. We could end up seeing SPX 3000.  Look at how much LT bond yields have risen. I've always said that major market declines were preceded by a major rise in bond yields. I've always said that a bull market will die when there is euphoria coupled with tight monetary policy. The euphoria part is debatable as there was euphoria/greed in certain segments of the market i.e. unicorn tech and crypto along with  housing, but not broad based euphoria. Tight monetary policy is there with the long end of bond market but not yet on the short end, but that's going to change very soon as the fed hikes rates by 1% in the next couple of months. 

The crypto meltdown is yet another negative shock to the market because unlike in 2018 when it last crashed, this time around a lot more institutional money got in creating more linkages to the broad economy either directly or indirectly, the degree to which I'm not sure of. Crypto commercials during the super bowl was akin to the dotcom commercials in super bowl 2000 which by the way was won by the LA RAMs as well. 

Let's discuss sentiment for a bit. While there are certain measures of sentiment which suggest too much bearishness in the ST, the one measure that continues to be lacking of capitulation is fund flows. Although they have turned negative in the tune of $-44 Billion these past 5 weeks, they have done so rather grudgingly and there have been many instances which showed people buying dip on days when the market got slammed rather than running for the exists. I was hoping to see one week where we would get a $20B+ outflow.  Never happened. The  Recent NAAIM exposure came in at 24 last Thursday which is low. It can and has gone lower in the past but that's not the ideal situation to initiate a bearish bet. The CNN fear/greed index is also extremely low and hit single digits last week. That's at a level which suggests a low is or is close to at hand. Only when you have major meltdowns like in late 2018 and March 2020 will these indicators won't work. Could that happen now? Sure can, so you must be mindful of that. The NASDAQ continues to be the weakest index which is NOT good for the overall market. 

Bottom line is this. Enough conditions are in place for a major bear market for which it looks like we are in the first leg of. If history is a guide there will be one last major rally before the most devastating phase of the bear market plays out. There is of course, no assurance that such a rally will happen.  Even if I am wrong and this turns out to be a major correction like in 2011 or 2018, it's likely the market will go sideways for some time. Earlier this year I saw some warning signs which I didn't heed as much as I should have. For instance, on Linked In  I saw some guy who recently passed his level 3 CFA exam say something like "now all I need is for my stonks to go back up". And he said the word stonks,  a word often used back in the early 2021 unicorn stock bubble which is reminiscent of the dot com bubble of 2000. The crypto superbowl add was another red flag which also reminiscent of 2000. I know so many crypto bagholders.  High energy and  housing prices are reminiscent of 2007-2008 and so here now we have the worst of 2000 and 2008 in 2022. It would be naïve at this point   to think that we could  unwind the excesses without a major downturn like what happened in 2018. This time the excesses were higher and would appear to be too great for the soft landing scenario to play out. I will always keep an open mind how this will play out but as I've been saying for some time now, the benefit of the doubt can't be given to the bulls.

Wall of worry or market in denial?

Since my last post some notable things have happened. It's clear the Russian war hasn't gone nearly as smoothly as Russia would have hoped for. Low troop morale and poor execution appear to be hampering the Russians while the opposite has been the case for the Ukrainians. But if history is any guide, Putin will resort to increased brutality and force. The war resulted in a further flare up of inflation as oil, agriculture and fertilizer prices have spiked. Some of these spikes have subsided but they are still elevated and relief appears to be bleak unless a peace agreement is reached soon which doesn't appear to be case. In mid-late March there appeared to be a breakthrough in negotiations which have now all but disappeared especially after the brutalities of the Russians have been discovered. The 2 week rally from Mid March to early April appeared to be at least partially due to peace hopes and we have seen the market give back quite a bit of those gains. I would say the thing that is hamstringing the market the most is the blistering rise in bond yields. 

Some interesting things are happening from a sentiment perspective. We are seeing historical extremes in AAII sentiment.  The most recent readings are pretty much as bearish as it could be with a 3:1 ratio of bears to bulls last week which I think was a record. AAII sentiment has been persistently bearish for 3 months. II sentiment is also confirming the message of AAII. However, if you look at how retail investors are behaving with their portfolios it does not jive with how they are feeling. With AAII members, they have only reduced their equity exposure modestly to 68% from the peak of 71.4% in November. This exposure needs to come down further to confirm the bearish sentiment readings.  The other indicator showing stubborn/reluctant capitulation is equity fund flows which up until the last couple weeks has been positive. The past 2 weeks has shown a $25B outflow however, which is a good and necessary blood letting. This needs to continue.  NAAIM sentiment continues to show stubborn bullishness for the most part. It got as low as 30 near the market lows in March but then rebounded to 82 in early April. It dipped back to down to 63 but this week back to 74. Not good and I'm not surprised to see the market sell off today. 

There are some other indicators worth noting. The BOA bull/bear indicator is at 2 which is in solid buy zone. It was at 0 during the depths of the COVID crash mind you, but that's after a 35% decline in the SPX. The fact that it's at 2 with the market only having had a moderate correction is encouraging. I've also seen a chart showing that hedge funds have reduced their tech exposure by the most amount in 10 years. This also confirms another survey of fund managers I saw recently which showed a massive reduction in tech exposure. Meanwhile bond sentiment is at historical bearish extremes with prices being extremely oversold.  It's obvious as to why this has been the case with everyone expecting the Fed to hike rates to infinity. On top of this you got Fed rhetoric adding fuel to the fire such as Bullard suggesting that that the Fed could raise 75 bps if need be.  

Given how tied the tech sell off has been to the surge in bond yields it would appear that the tech space is a coiled spring the moment we get any kind of relief in bond yields. If you look at recent used car prices and shipping costs it would appear that inflation pressures are abating  but  the China lockdowns may have thrown a monkey wrench into this development.  Inflation expectations are already very high. All it would take is just a modest surprise to the downside and there would  be a violent reaction in bond yields to the downside. 

Netflix got smoked again after reporting disappointing results and this is giving people jitters about other growth names which aren't even in the same sector, but it's understandable. It easy to have doubts about holding high multiple stocks because the risk/reward doesn't appear favorable. If you disappoint you get slaughtered and if you don't you survive but then have to deal with the  headwind of rising rates which is capping upside. 

On an anecdotal basis, the doom and gloom is quite thick. Nothing but ominous posts on fintwit. There's no shortage of people who are worried about a Fed policy error, recession or what have you. Bulls like Fisher say that all of this doom and gloom is good because that means it's priced into the market. Perhaps so, but it could also just be the case that the market is in denial and is only slowly coming to grips with reality. How can rising rates be priced in if bond yields keep making new highs? 

With the prospect of 50bps rate hikes for at least the next 2 Fed meetings and signs of slowing growth ahead, it's easy to see why market sentiment is gloomy and the market trades so poorly. So far it hasn't fallen apart and the degree of damage doesn't match the level of negativity out there. If you take a step back and look at a long term chart, this downturn doesn't look bad at all....at least for now. It would appear that the best thing the bulls would be able to achieve is for the market to go sideways and work though the 2021 hangover with a headache as opposed to a coma and hospitalization. We have definitely seen an unwind in the excesses of early 2021. IPOs are essentially nil and unprofitable pipe dream tech stocks have been wiped out.  Margin debt has also unwound quite a bit. Back in 2000 the telecom/internet boom and bust was tied to the majority of tech names, both unprofitable and the profitable leaders like CISCO and Intel. That wasn't the case this time around. Today's tech leaders are in separate silos and are tied more to the general economy.  So, is the economy strong enough to sustain this adjustment phase of higher interest rates? Depends on how high they will go. Government spending although lower this year is still historically robust. There are reasons to keep an open mind that we can get through this year without entering recession. I'll discuss indicators forecasting recession in a future post. Suffice to say that there's not enough evidence to suggest one is immanent.  

Bottom line is that this is still a treacherous market but it's not all that bad just yet with the market off less than 10% from all time highs. For the bulls, the best thing they can hope to see is a sideways market for the next several weeks or even months, probably until we can see the end game for all the expected rate hikes. Although we are finally getting retail capitulation, NAAIM sentiment needs to back the fuck off as it shows that too many people are eager to chase rallies. I personally still continue to feel like shit when I think about the market and I too can't help to have a hopeless feeling about how things will turn out this year. Perhaps that's a contrary indicator suggesting somehow we will get through this without serious damage but I will not hold my breath. The burden of proof is on the bulls. 

Russia Invades and things look bleak

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

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

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

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

Update:

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