Sentiment reset with some flies in the ointment in the ST

I've had a ST cautious tone on the market in general since mid July. Back then I warned that the market was showing signs of froth and advised against chasing. Symptoms of the froth were a string of very low daily put/call ratios, fear/greed index at 80+, NAAIM exposure 102 and AAII sentiment showing 2:1 bulls to bears. I mentioned how the market needed to shake out the Johnny come lately bulls such as the trend following CTA types who went from low market exposure at the beginning of the year to high exposure.   As the market rolled over I mentioned that signs to look for at a correction low would be Fear/greed index at sub 25, NAAIM at sub 40, AAII bears 2:1 - essentially the opposite of July conditions. Well, these things all happened at the late Oct low. We've also seen CTAs running for the exists at the fastest pace since the COVID crash of 2020 to the point where they were short the market on par with the 2016, 2018 and 2020 lows.  We have also seen the put/call ratio average about 1.05 for the past 3 months which is quite excessive. Even during this latest rebound, the put/call ratio has been constantly above  which usually results in further ST upside.

The other thing I had mentioned a few months back was that the signs of froth we were seeing had implications for the ST, not medium/longer term as there were still plenty of fundamentalist type investors who were still skeptical and underinvested. I referenced B of A bull/bear indicator which is effective in gauging sentiment from a medium term  perspective(1-2years). It had only reached a high of 4.5 in the summer which is only in  the neutral range. Historically, you didn't have to worry about an immanent bull market peak until there's reading close to or above 8, which implied that any subsequent market decline from 4.5 would only be correction.  At the recent market low the bull/bear indicator fell all the way back to 1.4, back into the buy zone, lower than it was to start the year. To sum up, the 10% decline in the market has resulted in a complete sentiment reset,which clears the way for the market to resume its bullish advance which began a little over a year ago. 

Since the October 27th low we've seen quite a rebound in the market. It was sparked by the notion that the Fed has given hints that it done hiking...or at least that was the impression given by a softer than expected tone by  Powel at the last Fed meeting. Jay tired to pour some cold water on that notion yesterday at the IMF meeting by stating there's still the possibility more rate hikes would be needed and is wary of disinflation head fakes. He also told somebody to shut the fucking door.  The market seems to have disregarded his comments for now at least. It's incredible and quite silly how much of a Fed obsession there is out there, as if they are the masters of the market universe; as if is monetary policy is by far the single most important variable of the stock market. As if the disinflation we’ve been seeing since June 2022 was largely due to monetary policy. Go back to my Inspector Gadget post from last year…it’s playing out just like I said it would.

There are some things that I don't like about this latest rebound.  First of all, it was initially driven by the "Fed is done" narrative, which runs the risk of being premature which would not the be first time this happens. The horribly lagging inflation data that the Fed tracks is still not sufficiently suggesting its a slam dunk by any means, however, next week's CPI report will show the impact of significantly lower month over month gas prices and lower used car prices as well.  Perhaps the market has front ran this already. Speaking of inflation, the 5 year breakeven spread is currently at 2.3% and has been more or less around this level for 8-9 months. The day to day readings can get jumpy at times such as when it had a little spike to 2.53 in October.  Fintwit was sure to point this out, implying that inflation was about to flare up again. Funny how fintwit is either quiet or in disbelief when the break-even spread had been hovering in the low 2's for several months. To me, it's not hard to see why this is so.  Shelter is the largest component of CPI comprising 30%  and 42% of headline and core figures respectively and it is baked in the cake for it to decline rapidly in the coming months.  Data used to calculate shelter is horribly lagged by about 12 months. The yoy inflation of market rents/leases have been steadily declining, hitting pre-COVID levels in June and in the past few months are now tracking BELOW  pre-COVID levels. So, it would appear that shelter CPI will be "normalized" by mid 2024 and onwards thereby putting downward pressure in the CPI for the next several months. It's probably likely that used car prices will also roll over significantly from here as well.  

I digress. The ST concerns I have at this point is that we are quite ST overbought now with some indicators of sentiment having rebounded very sharply in short period of time. AAII sentiment went from 2:1 bears to bulls (sufficient to mark a correction bottom) last week to 1.5 bulls to bears this week. That's probably the biggests reversal I have ever seen. NAAIM sentiment also went from 29  last week (another marker to suggest correction bottom)  to 62. 62 is not an extreme number but the huge jump is what's notable. This rally has also created 2 notable gaps in the charts. I fucking hate gaps like that as they tend to get filled, but not all do. The ones that don't, tend to happen at  major inflection points Some people I bet  are still waiting for the March 10, 2009 gap that kick started the bull market to get filled. The correction which started Aug 1 began with a gap down that did not get filled...at least not yet, but even if does eventually, you can see how it had staying power. I would expect the current gap from 4300-4330 will get filled at least. The one below that would require SPX 4220 to get filled. That one I am less sure of.. 

When the market hit a low on Oct 3, most of the aforementioned indicators were signalling bottom ( AAII was the exception at 1.5 bears to bulls, not quite 2:1). Then we got a rally and a lot of folks flipped bullish quite easily as calls for a year end rally became prevalent. The rally turned out to be a nasty headfake to which sentiment became extremely bearish again at the Oct 27 low, more so than on Oct 3 . Now we are seeing similar bullish flipping happening with this rally. I see evidence of people too eagerly turning bullish for a year end rally again, however, the persistently elevated put/call ratio suggests the opposite. In fact, it suggests more upside.

On August 21, after the market had declined 5%  I wrote that the market was ST oversold and due for a bounce but not to expect that such a bounce would lead to a new leg higher. That turned out to be exactly what happened. I think we are in a similar situation but in reverse. The market is now ST overbought after having rebounded 7%.in a short period of time. It was achieved via 2 large unfilled gaps with bullish sentiment reversing very sharply, both of which are not constructive action. On the other hand, the put/call ratio had been stubbornly high all week which is contrary to the bullish sentiment and supportive for the market..That could turn on a dime but until it does it’s bullish and is arguably a more important indicator than sentiment surveys as it shows what people are actually doing with their money vs just feelings. So, It would not surprise me if the market goes higher still before peaking at some point mid or late next week and turns down but it shouldn't result in a lower low as medium term sentiment indicators have been fully reset. As usual I reserve the right to change this view as things unfold. 

This post was mainly a tactical discussion. In the next post I will discuss more about fundamentals and consensus views/expectations for 2024. . 

It's been a while

I've been busy lately and haven't had the time to properly sit down and do a post.  Man, a lot of things have happened since my last post. Obviously the war in Israel is the big one. I've always had a fascination with war history and so I did some research on this conflict and was intrigued.  I was going to give a long detailed take on this conflict but I'm only going to say a few tings. It's a sad situation which will be difficult to resolve because of the ingrained hatred on both sides which has only gotten worse now. Israel is entitled to a response and you can make the case that their response is largely disproportionate but such is war, especially when the weaker nation attacks the stronger one. With Israel being in the position of strength, it will dictate when this current war will end and set the terms for any cease fire or peace agreement; and given Israel's current right wing government, such terms will probably result in the Palestinians being  even worse off which means more resentment, more unrest in the long run. The issues that existed prior to this war will only grow worse. Israel's expansion of Jewish settlements in the West bank is an example of how their current government doesn't give a shit about the Palestinians and is only concerned about increasing Jewish interests at their expense. It's one thing to try to justify a heavy handed approach in Gaza in the name of security (which I believe is punitive) but there's no justification at all for the expansion of Jewish settlements in the West Bank which understandability fuels further Palestinian resentment and violence. For there to be any chance of peace in the long run, Israel has to have a more sympathetic government towards Palestinians. They need to encourage the Palestinians to reject Hamas and other terrorist groups  by offering them a way out and a better life in exchange. Israel needs to show the first act of good faith but that's going to be politically extremely difficult and it definitely won't be with this government. Israel is always critical of Arab countries who don't recognize their right to exist but yet they treat Palestinians with similar contempt. Yes, I get that Israelis will say that this is only because Palestinians/Arabs have always had contempt towards Jews. The cycle of hate and blame needs to stop and it can only happen when both sides agree to wipe the slate clean and have mutual respect for each other's existence and rights going forward. At this moment it seems like an impossible task.  

Next post will be a market update which will come shortly. 

  

  

 

Bearish undertones still there

We got the bounce I was expecting so now what? More on that later. Jackson hole proved to be a non-event as Jay Powel didn't say anything all that surprising. In a nutshell, he said that the Fed is still prepared to raise rates if needed and that inflation although falling is still too high. I'm not going to get into discussing how much of a bonehead Jay Powel and Fed buddies are. I'm not going to discuss how the recent fall in inflation was largely self-correcting and had little to do with rising interest rates. Ok I lied. When it comes to inflation pretty much everyone just focuses on the impact rising rates has on the consumer,, namely the demand to borrow money and the ability to service debts. Rising rates means less demand to borrow money and more income required to service debts, therefore less money to spend and therefore less inflation...at least that's the narrative. But hardly anyone mentions the impact rising rates has on the supply of money. Banks are more inclined to lend when rates go up as they make more profit  Rising rates also creates a fiscal impulse as higher interest payments are being issued on newly issued bonds and savings accounts. Higher rates also increases the cost of capital which can lead to higher prices being charged and raises the financing costs of expanding the supply of goods and services. These supply side impacts of rising rates are inherently INFLATIONARY. Even if you only focus on the naive, consumer only perspective, you have to take into account that the vast majority of  consumers in the US have locked in low rates on their mortgages for several years which has blunted the squeeze of higher interest payments on existing debts, however, there is a squeeze on auto loans and other non-secured debts but these are smaller relatively speaking. The bottom line is that impact of rising rates on inflation is complicated as there are offsetting factors.  If you look at anytime there was an inflation problem in any country it was mainly rooted in problems with the supply side of the equation. Demand for goods and services is generally steady and inelastic. We all need a consistent amount of food, shelter and energy, but the supply of these things are not always steady. Supply disruptions/shortages can happen for a number of reasons such as forces of nature (i.e. bad weather), political (such as embargos and nationalizations) and pandemics. Raising interest rates will do fuck all to stop the impact of a supply shock, if anything, it may exacerbate it as will be prohibitive to the financing of expanding supply which would be badly needed. We had a supply side shock in the form of a pandemic and now that the shock is normalizing inflation has come down with it, yet everyone is giving credit to the Fed for this. Bullishit. They might actually be hindering the disinflation.  I was right when I wrote last year that the Fed is like Inspector Gadget. But I digress....

Back to the markets.  NAAIM sentiment dropped to 34 on August 24th which was the lowest reading of the year.. That's quite a running for the hills for just a 5% pullback.  It did bounce back to 61 last week but that 34 reading  ticks the box for being at an extreme where solid, Intermediate term lows tend to be made. There have also been pretty notable equity fund outflows for the past 4 weeks totalling about $30 Billion  and  put/call ratios continue to be elevated and have been high enough to suggest an intermediate term low has been reached.. All in all, it didn't take much of a decline for  people to run for the exists and that's the kind of behavior you want to see if you're banking on the recent decline being a healthy bull market correction. Hedge fund positioning has backed off but I would like to see it back off a bit more, so it's not an all clear just yet. Am I being too cute? I could be.  It's a bit tricky now to call the ST. The easy money of the bounce has been made and of this bull run YTD as well.  I can see the market going either way from here this month but if we go higher it probably would not lead to a new leg higher. I still believe the likely path of the market for the next 1-3 months is sideways with the possibility of a slightly lower low. As usual, my outlook will adjust as things unfold. 

A couple of weeks back when NVIDA announced earnings after the close, I took a look at the messages being posted on the stocktwits message board.  Despite the fact that the company reported blow-out numbers, the vast majority of the messages posted were bearish.  It seems people were betting or hoping the stock would go down. Many people are calling NVIDA a bubble stock, yet you wouldn't see this kind of bearish posting back in the heyday of the tech bubble of the late 90s. You  would have seen everyone cheering and pumping the stock. Back then bears were an endangered species whereas now they are a dime a dozen. I'm not on expert of NVDA and I know the stock is not cheap using conventional valuation metrics but what I do know is that there is a bearish undertone to this market which has been in place for the most part since 2009. If you've been reading this blog over the years (I'm not even sure if anyone actually does) you will know that I have used the term permabear trading community to describe a large portion, if not the majority, of traders out there.  These folks became jaded and skeptics because of the crashes of 2000 and/or 2008 and I bet a good number of those who were posting bearish messages on NVIDA were tech bulls in 2000 lol.  When most people first start trading/investing they are inherently bullish looking to buy stocks they believe will go up. Very few, if any, start their foray into the markets as bears always on the look out for what could go wrong rather than what could go right. 

During the market recovery of 2020 we saw the rise of newly minted young traders who piled into speculative tech, crypto and meme stocks. Now after getting burned, they too have probably joined the ranks of the permabear trading community while some are still delusional. I have a friend of mine who is also an experienced advisor.  He got balls deep into  the meme stock fever. He, like all other holders of AMC  was convinced that there was going to be a short squeeze of epic proportions and every time a rally would fall part he would blame it on manipulation by the powers that be and his negativity has coloured his outlook on the markets in general.  Anytime he discussed AMC with me and the grand conspiracies surrounding it  I didn't even bother trying to challenge him as there was no use. I would just nod along and wish him all the best. Now that AMC has been  decimated these past few weeks I'm sure he's more bitter than ever. We've been planning to meet up for some time and so I guess I'll know soon. 

Give it time and keep an open mind

I've been warning since mid July about the market getting overheated and now low and behold we've see the SPX drop about 5% from the recent peak. Rising bond yields appear to be the main culprit which I also warmed about. So now what?  Has the froth I warned about been unwound? Well, a good chunk of it has.  Put/call ratios have soared, NAAIM exposure is back to 60%., AAII sentiment is 1:1 bulls vs bears, Fear/Greed index back to 45 and the market is a quite oversold on a ST basis as per McClennan Oscillator.  Thus, there's  enough evidence to suggest a ST bounce is immanent but I suspect that if we get one, it won't signal the end of this corrective phase that we are in. I suspect at best the market goes sideways until end of October - mid November. A bounce followed by a lower low at some point is probably the more likely scenario but like I've always said, be careful trying to predict every wiggle in the market because it's often a fool's game. I will defer to the indicators. Right now they are oversold enough for a ST low to be immanent but they would need to be more oversold in order to provide a high conviction, longer term bottom signal. We're talking about AAII bears outnumbering bulls 2:1, NAAIM at sub 40 and Fear/Greed at sub 25. There's no guarantee of course that we will get these readings before hitting a low - the market may find a low well  before or well after such readings are hit. 

The Jackson hole speech this Friday will likely be a market mover. There's no denying the sell-off in LT bonds is hamstringing the market. I noticed a large outflow in TLT last week and it appears to be quite oversold as well at it re-tests the October low. So what's behind this bond rout? LT yields are theoretically supposed to reflect the average of what ST rates are expected to be over the duration of the bond plus a maturity premium. It's obviously not that simple as there are  buying and selling of government bonds as the result of changing needs/circumstances of its various holders in particular, the big boys which are foreign centrals banks like China and China has been selling US bonds significantly as of late. Of course, for every seller is a buyer, but as with any asset, if sellers are more urgent to sell than buyers are to buy at a given price, the clearing price will drop accordingly.  Despite the bond rout,  5 year break even spreads of TIPs have hardily budged and continue  to be subdued, hovering around 2.2% which suggests this rout does not appear to be driven by a repricing of higher inflation expectations which would truly lead to a higher for for longer Fed funds. Fed fund futures pricing also confirms this.

Bottom line is that although there's been a good amount of froth unwound in the market and a good bounce can materialize soon, I wouldn't get too excited about the prospects of the market until perhaps sometime in the fall. Could this be the start of something more than just a bull market correction? Of course, and we need to give that some consideration but as of now I don't see that being the case. If we see lot of people buying the dip and other signs of complacency that would make me change my mind.   

Wait and see

Some interesting things have happened since my last post. We had Fitch downgrade US debt and some notable bears like Mike Wilson from Morgan Stanley threw in the towel. As far as the debt downgrade goes, it's still clear to me that there's a continued misconception about the nature of government debt. Seems like these rating agencies didn't learn anything from S&P's downgrade in 2011...meanwhile these are the same jokers who slapped AAA ratings on subprime MBS. Wrong in both cases.  Unlike you or me, a  sovereign currency issuer like the US has the ability to literally print as much currency as it wants to pay its debts. If they held debt in another currency, that's another issue. But as we've seen earlier this year and in prior years, the US places a self-imposed constraint with the debt ceiling which ends up being an excuse for political gamesmanship So yes, technically the US can default but only if they deicide to shoot themselves in the head. As idiotic as many politicians are, they know that the consequences of a default are to be avoided and so it always will be.

Some of the extreme bearish positioning that has underpinned this bull run since October has been unwound along with a few bearish strategists  throwing in the towel for their recession calls in 2023. These developments are only natural after such a bullish move in the market. What we need to ask ourselves is have we used up all of the bear fuel? I don't believe we have from a longer term point of view but the ST does appear to be sketchy. I've seen quite a turnaround in the positioning in  hedge funds types to moderately overheated levels. These would appear to be trend following, CTA type funds whom I would classify as weak longs as they would no doubt bail once the momentum turns against them.  But if you look at the overall positioning crowd there is still plenty of fuel in the tank as there are plenty who position based upon their perceived notion of fundamentals and there's still plenty of skittish folks. Those bears who have capitulated are not exactly bullish, they are just admitting they were wrong with their timing. They still think recession risks are elevated for 2024 and are only grudgingly accepting the chance of a favorable outcome, but they want to see more proof. One of these capitulated bears is Morgan Stanley's Mike Wilson. I read this morning how he acknowledged strong fiscal spending as a supporter of the economy as part of the reason why his recession call did not come into fruition. He, like pretty much everyone else, was instead fixated on monetary policy. Maybe Mike finally discovered my blog lol  I've said it here more than once that robust deficit spending was supportive for the economy. Morgan Stanley wants to see "a broader swatch of economic indicators" turn up including  rate cuts before being comfortable with the economy being in an upturn. Again, as I've said ad nauseum, if you wait for the all clear before jumping back in, you will end up having to buy at all time highs and at that point, you will probably hesitate again to buy because prices and valuations will appear high - I'm already seeing plenty of people complaining about valuations now.  

Despite  a ST  overheated market, there's still ample fuel left for this bull run. Rising bond yields are not equities friendly and at some point will likely matter, but anything could be trigger for a correction/  consolidation. Bonds have hurt both bulls and bears this year. Coming into this year bulls figured the Fed was pretty much done and so even if rates just stayed on hold a sideways market for high quality bonds would yield a 5%+ annual return.  Meanwhile, most bears were penciling in a recession and therefore immanent rate cuts which meant bonds would be a source of  strong capital gains. Some of the bears who I follow on twitter openly mentioned a few months ago how they were long bonds and one guy was also short stocks too. Other bears I saw last year  got long vol as a way to express their bearish views which was a disaster of a trade. All these fintwit bears got slaughtered and I haven't heard a peep from them in about 2 months. Maybe this suggests the bears are due for a reprieve.  July CPI gets released in a few days which is typically a ST market mover. If it's market friendly do not be surprised if we get another run for the highs before the market finally rug pulls later on in the month  or in September. All of this is just guesswork of course and I don't like to fixate on the very ST which is usually too random to call. But the bottom line is that in the ST (1- 3 months), it's not a  good risk/reward set up on the long side.  

The one indicator that sums up where I think we are in this cycle longer term is the BOA bull bear indicator. It hit the max buy zone of 0 in mid June and hovered around there for several weeks. It currently stands at 4.1. In the past, anytime it hit 0 and rose from the ashes, it signaled a new bull cycle which was not in danger of a top or major decline until it rose to  8. This does not means corrections of 5-10% can't occur in the interim. I'm not necessarily expecting that deep of a correction...we'll see. The other thing that makes me believe we are perhaps in the mid innings of this run is the lack of IPOs. I read today how IPO issuance in Canada has been very weak, on pace to being the worst year on record. IPO weakness is also the case globally. Major market tops tend to-coincide with IPO frenzies and right now it's still in the doldrums close to where you see major bottoms not highs. That can change quickly of course but until it does, the bull run would appear to have ample fuel in the tank to go higher longer term as we continue the unwind of  pessimism/cautiousness  to optimism/complacency. 

Even the bulls have been caught off guard this year so far

It's been a while. I was in Korea throughout June, my third time visiting as this is where my wife's family resides. I always get a kick from the celebrity status I get over there being a white male.  I had visited a coffee shop to get a latte to go and the girl working there wrote a message on the lid in Korean which basically translated to "meeting you has made my day" lol.  The last time I was in Korea was the fall of 2014 which was when the Greenstar debacle had been unfolding. It certainly spoiled my trip. While I had been there the nail in the coffin was delivered when news was released that all the Canadian directors had resigned. I remember how my heart sunk after reading it but I hid my emotions from  my wife as I did not want to spoil her trip. Returning home from that trip was hard knowing what I had to face but looking back I give myself credit for my mental resiliency but I never want to be in that kind of a spot again. 

 Ok, so let's talk markets. There's been a notable shift since my last post. Some of the market skeptics have thrown in the towel or at least have given the bull market case some respect. The employment report released back in May started this shift because it indicated that the recession by end of q2 call was dead in the water. Last year at around this time you had Jamie Dimon calling for an economic hurricane, Elon Musk saying that he had a super bad feeling about the economy and Jay Powell saying that we need to see economic pain to get inflation down. Well, here we are a year later with economy still in tact and inflation pressures significantly on the decline. This week's inflation reports have made this really obvious and at the same time BOC hiked rates by another .25 and stated something along the lines that the downward momentum in disinflation may not last. What a crock of shit. This sounds the opposite of the "inflation is transitory" narrative they were echoing from Jay Powel 2 years ago. They are just trying to save face for what will turn out to be yet another idiotic and unnecessary rate hike. Like  I've been saying for a long time here, central bankers are largely clueless when it comes to forecasting the economy as are most economists. I've been saying here since at least last fall that inflation pressures are set to drop significantly by looking at forward looking data and at history. The most similar comparison to our inflation episode is the 1940's post World War 2 spike, not the 1970s like how most people think. This thinking is a classic case of  recency bias. Although the 70s weren't all that recent in regular speaking terms, it was the most recent period in which we had a major inflation problem.  It's becoming painfully obvious that our inflation problem was in fact primarily due to COVID supply chain disruptions. Yes, there are some long term structural issues like early retirements and re-shoring that may end up making it difficult to sustain a 2% inflation target long term but the truth is this inflation episode was indeed largely transitory, it just took longer than what the Fed heads had hoped for or expected. Prior to COVID inflation was not a problem and so I never bought into the 1970's inflation narrative. My go to  forward looking indicator of inflation is the 5 year break-even spread. It has been hovering around 2.15% for the past 2 months which means the bond market is forecasting the CPI to average 2.15 %  or so over the next 5 years from this day. If that turns out to be the case, short term interest rates are too high right now. The break even rate has a very good track record of being proven accurate with its implied inflation forecast. With that in mind,  it should be notable to realize that it peaked March 25th of last year at 3.59% and has been in a downtrend ever since signaling that future inflation rates were set to fall significantly for which it did. 

At the beginning of the year I had made the following observations about the consensus calls for 2023

• Bad first half, good second half with lower low in market
• value over growth
• underweight tech
• higher for longer
• recession evident before end of year
• flat to modest gain in the market

What's the motto of my blog again? Lol. The market has not only badly foiled the consensus, but it even did better than what the minority optimists were expecting. More people are finally starting to realize that the economy has been resistant to higher interest rates because the vast majority of consumers and businesses had locked in rates back in 2020-2021 and both have notably lower leverage compared to 2007. I hear chatter  about excess COVID savings keeping people afloat but I hardly hear anyone giving any credit to fiscal flows as a major supporter of the economy. Although well off the COVID highs, the deficit as a percentage of GDP is still a robust 5.5%. People tend to obsess over interest rate policy while paying little attention to fiscal flows. Interest rate policy is highly overrated, while fiscal policy is highly underrated with respect to its impact on the economy because fiscal policy has an immediate and significant impact on the economy while monetary policy has an ambiguous effect at best. I already discussed this is a previous post. 

So, where do we go from here?  With the SPX up 18% YTD and the market having gapped up in recent sessions, not to mention NAAIM at 93%, a low string of put/call ratios and fear/greed index at 80, this is not an ideal time to be entering new long positions unless you have high conviction on a certain individual name that's relatively non-correlated to the market. Recent action looks like a ST blow-off type move here. If you missed the boat you have to wait for the next one. If the market just keeps rising from here so be it - you just have to be patient as it most likely would give back any gains  But, I do believe that the market will hit all time highs by year end or early next year.  With the market only about 6% away from all time highs and given that there's still quite a bit of defensive positioning this looks like an inevitable outcome, but we will probably see a shakeout of the Johnny come latelys first. 

Despite ST overheated markets, the medium-long term still looks good from a contrarian point of view. BOA bull-bear indicator is only at 3.5. Remember in June I had posted this indicator had hit literal rock bottom of 0. At 3.5 it's not even at a neutral reading. The average Wallstreet Strategist price target for the end of year is about 9% lower than where the market is right now. Such a bearish outlook especially in the face of such bullish market action YTD gives a strong contrarian bull signal. The average posture of fund managers as per BOA survey continues to be risk adverse. I get why there's still all this cautiousness. The fundamentals appear to be shaky at best, whether  because of high rates, shoes that are sure to drop or whatever, but this was also the case in the second half of 2009 and 2020. I've said this before many times, if you're waiting for all the fundamentals to look good again, the market will be at all time highs.  History suggests that the length and magnitude of this rally is signaling better times ahead and that any of the negatives you are seeing either will be fleeting, won't matter or at least won't matter for some time. "Oh please, the market is being driven by 7 stocks" would be a common bearish retort Well, what if we start seeing the smaller stocks take the baton and lead again as they did from October-February? In fact, from June up until now small cap stocks have been quietly outperforming large cap. Quite early to suggest a trend, but if we did end up seeing better participation from small cap, what excuse will the bears come up with then? I'll tell you what the ultimate/default excuse will be - high valuations. When the doomsday macro calls don't come to fruition the bears always defer to high valuations.

The fuse is burning

I love this time of the year. I get this cozy, content feeling as flowers bloom and the weather warms up, knowing that a lot more good weather is still to come.  Last week was my birthday. When you're very young you can't wait for your birthday to come but that changes when you get older. When I hit  my mid 20s I started dreading my birthday, because it was a reminder that I had not had a successful life both from a personal and career standpoint. I was falling behind in life. I felt as if I was still at the starting line while friends and family were so far ahead of me. Every so often I would get an intense feeling of anxiety or  sadness as I reflected upon my life thinking that I've failed to live up to my potential, but I wouldn't dwell on these negative emotions for long. I never fell into a depression or felt sorry for myself. I would always pick myself back up knowing deep down that I had what it took to be successful in all aspects of life and I still had time on my side to make things right. I knew that the correct approach to get to where I wanted to be was to stay positive and take action, doing things that are in my control which would increase my chances of success. I was able to get my life back on track through persistence, skill and a large heaping of luck. It wasn't a smooth path to recovery by any means. The last 2 major setbacks I had to endure was the Greenstar debacle in 2014 and me getting fired from a job in 2018 (which I saw coming and was a relief). Ironically, both of these setbacks were part of a chain of events which led to me where I am today. I ended up landing a great position working with a great team of people with an amazing pipeline of opportunities. I also recovered all my losses from Greenstar. I could not have asked for a better situation to be in. Prior to Greenstar I was managing my own money and that of a few personal friends/acquaintances via an informal, good faith arrangement.. Now, I have a "real job" as an advisor and only personally manage my own money. My advisory role allows me to earn a solid income relieving any pressure for me to have to perform with my personal money. I have a really good foundation in place to have a lot of financial success  As I mentioned prior, a big part of being in the situation I am in right now was due to luck - perhaps it was the biggest factor, it definitely was not the smallest. If you look at successful people, luck is often a key contributor to their success. Yes, skill, working hard, and having a positive attitude are critical,  but non-controlling factors such as your parents,  being born at a particular point in time,  growing up in a certain country, coming into contract with certain people by chance are things that you can't control yet they are often crucial in providing the opportunities for your skills,  hard work and positive attitude to bear fruit. I for one will not be complacent about the situation I am in now. If anything, I get overly worried that something could derail me once again. Last year I had some sleepless nights because of the market even though I had properly positioned clients and myself.. I couldn't help but fear that my career and financial well being would take a major turn for the worse. I knew deep down it was an irrational fear but I couldn't help it. I've weathered the market storm quite well but by no means do I get an all clear feeling. I, like most people, am bracing for more upheaval and that's probably a good sign.   

 In my last post about a month ago I suggested ST caution. The market didn't really go anywhere afterwards until last week when it made a marginal breakout. Since my last post the Fed hiked by .25 and strongly suggested  that future rate hikes are unlikely but that rate cuts are also unlikely .Markets meanwhile have been pricing in  about a 1% rate cut by the end of the year and about another 1.5% cut by the end of 2024. When I see the market pricing in such a radical difference from the present like this, I pay special attention and I tend to believe what the market is signaling about the future because I have found that the market gets proven right. For instance, when oil was  trading sub $30 in 2020, futures were in a steep contango, correctly forecasting that oil prices were poised to rise significantly in the months ahead.  The opposite happened in the spring of 2022 when oil prices were north of $100. Futures were in deep backwardation signaling lower prices in the months ahead. I saw similar signaling behavior in the futures market for iron ore. So, if we are to believe that the futures market will be right about the Fed cutting rates it must mean that inflation is going to drop significantly from here. That can happen either in a bad way or a good way. The bad way is that we have a recession and/or  financial crisis. In the good scenario, it will be the result of inflation subsiding back to 2-3% without a nasty downturn, (perhaps only a slowdown) as COVID induced inflation pressures are largely wrung out. The vast majority are clearly bracing for the former, not the latter, yet so far the evidence is suggesting the latter is playing out. Remember, at the end of Q1 when a recession didn't materialize, bears simply scoffed and moved their call to June. Well, June is just around the corner and still no signs of a recession, meanwhile the market is hanging tough, grudgingly at the high for the year., up about 10% YTD.

Over the past few weeks there has been 2 major concerns about the markets. One of them is the dreaded debt ceiling, the other is poor market breadth. All the talk and worry about the debt ceiling  reminds me of  Y2K fears people had about computers shutting down at the turn of the millennium.  I see people pointing out how the market reacted badly in 2011 when there was a debt ceiling impasse which resulted in the credit downgrade of the US debt (which was so silly) which resulted in stock market turmoil - ironically US treasuries rallied HARD on this "downgrade". The big difference between then and now is that there's no surprise factor this time around. All of today's worries actually increase the chances of there not being another crisis this time ,because since authorities are so well aware of what can go wrong, they are motivated to do what's necessary to avert/solve/mitigate any crisis before it can happen.  If someone tells you I'm going to punch you in face in 5 seconds, you would probably put your guard up or be ready to duck. Quite a difference compared to if someone cold cocks you. This analogy applies to the markets in general. Major moves in the market happen as a result of surprises -  things that are not expected or priced in. Think about what expectations were coming into 2022. The consensus forecast by the  "experts" was for rates to remain ultra low for the entire year with only modest hikes penciled in by the end of the year at most. The negative surprise of rapid rate hikes along with the Ukraine War resulted in a significant resetting of expectations lower hence lower stock and bond prices. Coming into 2022 I'm sure there were also plenty of folks thinking "With the Fed fund rates at 0%, I don't have to worry about a bear market on the horizon - that's never happened. I'll have time to get out once rates have risen significantly." The market obviously front ran the Fed in 2022 leaving people in disbelief and slow to react for the first 6 months of the year. 

Now we have a situation that's the  complete opposite in many ways.. Higher for longer  has replaced lower for longer as the consensus view.  "There's no way the market can be in bull mode with rates this high" is what a lot of people are thinking I'm sure.  Yet, here we are with it been 7 months since the market has made its low, up about 20% since that point and now higher than it was 1 year ago. That's simply not how bear markets behave. Oh but it's only a handful of tech stocks driving the market. Yes, that's true. Since the banking crisis in March, the small cap stocks have not recovered all that much. But remember coming into this year, nobody wanted to touch tech stocks and nobody was pointing out (except for me and few others) that the average stock was performing well with several sub sectors looking much better than the overall SPX. Nope. Instead people were complaining and warning about lagging tech. Then things changed. Now, it's the opposite situation. People are complaining about how it's only tech holding up the market. It would not surprise me now if we see small cap start beating tech in the coming weeks just to stick to the herd once again which has been relentlessly bearish in general. The market doesn't make things so neat and obvious otherwise most people would correctly be buying at lows and selling at highs. 

The bottom line is that despite the market's good performance YTD,  market expectations in general  are still quite low in my opinion, as there still a large cohort of investors/traders who remain defensively positioned and have been skeptical about the market for several months. I read from a bearishly inclined money manager how the average household is still holing a historically high equity allocation, yet they never mentioned once over the last several months how money managers and retail trader types have been very defensively positioned, overweight bonds and cash vs stocks which obviously has been the wrong posture.  The ST is often tricky and right now at this point the indicators are a mixed bag. A bit of a shakeout would make the market more primed to make a sustainable breakout later in my opinion.  What  I'm more certain of is that there's a  powder keg of buying power out there and as each week goes by where there's no dreaded recession or financial upheaval, the fuse keeps burning, getting closer to the point where this powder keg could explode.