Much needed sentiment reset but not out of the woods

Coming into this year I was not bullish on the market for 2025 as I had noticed several red flags. In a nutshell, there was too much bullishness, too much complacency. The orange swan event of recent weeks has washed away and reversed such conditions creating a reset in sentiment. There's now plenty of evidence showing that the market may have either hit a bottom or in the process of forming one given the major retreat in positioning and expectations.  Here's some charts which show you what I mean:

Coming into this year, the consensus view was rosy for the markets with the average price target implying a 10% gain for the year. Now, the median price target has dropped to about 6000 on the SPX  as many firms have been scrambling to cut their targets and the consensus call now is that we are going to have a recession. There's obviously good reason for this sudden about face and pessimistic outlook, but I would be a lot more concerned if most stategits and fund managers remained hopeful and didn't capitulate. This reset in sentiment is much needed if the bull market is to eventfully resume. 

I like to use my "waking up from a 5 year coma" example in an attempt to view the market objectively, without being emotionally influenced by current narrates as you wouldn't know what they are. So, if you just woke up from a 5 year coma and I showed you the above charts along with an overlay of the chart of the the SPX, you would have to objectively conclude that the market would appear to be in a strong buy zone if you had a long term horizon. You would have to conclude that this decline looks like a severe correction/short lived bear market. History shows that if you put your faith in the indicators when they show extreme risk aversion and starting buying, you will get well rewarded...perhaps not immediately and perhaps with the market going down further in the days, weeks or even months ahead,  but in 9-12 months. Of course, it's difficult to have faith things are going to work out when you are aware of the narratives which are bleak and if you're watching the market every day, tick by tick while being blasted by news headlines like so many people do. Eventually, emotions and impatience gets the better of folks and they shit the bed.

Near the depths of the 2020 crash, the 2022 lows and now, I had this hopeless feeling that we were going to be fucked.  Maybe this time we will actually be fucked by this orange clown who is wrecking havoc, or perhaps things will somehow, someway not end up as bad as feared. Here's the thing...whenever you have a crisis, whenever moods sour so suddenly like they have now, it can create strong reactions/responses to mitigate or undue the very source of the crisis. I'm sure you've heard of the notion that if you put a frog in a pot of water and slowly increase the temperature, it would remain there and eventually get cooked without realizing it, but if you put a frog in a pot of boiling water it would jump out immediately.  The fact that we have seen an immediate and severe adverse reaction to Trump's tariff plans, has businesses already scrambling to make adjustments and/or plead with Trump to change course. It's also sounding alarm bells within the Republican Party and the courts to take action against Trump. But swift action needs to be taken now and damage is already done. Business confidence is shaken as plans are being put on hold and I'm sure economic activity has slowed as US imports from China have falling off a cliff. There's also going to be significant drop in tourism from foreigners and there's been dumping of US dollars and bonds. What a mess. On Easter Sunday Trump posted a hateful Easter rant about Democrats and Joe Biden on his Truth Social platform. What a piece of orange shit. And we have 4 years of this asshole. He's also been critical of Powell indicating his willingness to fire him. All of this just leaves a bad taste in people's mouths at a time when there is so much market uncertainty and fragility. 

Bottom line here is that we are seeing extremes that in the vicinity of where prior major corrections lows were made, but the scenario we face today has such ominous implications to take the market to significant new lows unless we see a major back peddling by Trump. Trump looks at the markets as a sign of approval and right now the market is sending the message loud and clear.  You always have to keep in mind that the market will price in all widely known information. There has obviously been a significant downward re-pricing of expectations, bracing for a drop in expected earnings for this quarter and probably next quarter. The question now becomes has the market priced in enough? The above charts suggest a lot of negatively has indeed been priced in but you can't assume the worst is over until market action proves it. Bulls do not get the benefit of the doubt. 

History shows that in a bear market, it typically starts off as a moderate more measured decline and it's only in the final or later phase where you see the scary, waterfall type declines as this is indicative of emotional, panic selling and forced selling from margined players. Strictly by observing the waterfall type action we're seeing, it would suggest we are in the final or later phase, rather than the beginning of a bear market.  It is reminiscent of what we saw in 2020, 2018 and 2011. Positioning/sentiment also supports this notion. Going further back to the GFC we saw the major waterfall phase of the decline in October 2008 by which the low then retested twice in November and March via lower lows as market internals showed positive divergences. Of course, the GFC was a once in century type storm. Although the current crisis can have the making of being a once in a century type storm, it is largely self-inflicted and can be undone although some damage would likely remain. The leverage in the non-government system is also nowhere close to what existed in the GFC.   

Market action will give you clues as to when this shitstorm has passed. During a true recovery, aside from the initial rally near the bottom which tends to be strong, you will see the market advance with resiliency and lower volatility accompanied by skepticism of its sustainability. Until we see this type of action, you have to assume we are in the grips of a bear market and respect that. So far, it has been the US market which has been hit the hardest, with International holding up a lot better, but if the US meltdown accelerates and hits new lows, I doubt International markets would continue to be safe havens. We are also seeing gold soar. This is clearly an indication of fear and a vote of non-confidence in the US dollar. This decline in the USD and rise in government yields is admittedly alarming, but the parabolic nature of the run up in gold as of late is also indicative of where we may be in the market cycle for gold and USD. Gold had been rising steadily and quietly for several months, but now is going parabolic which is what you tend to see near a major peak.. the oppose of the waterfall action you tend to see near major lows. Parabolic rises and falls are indicative of emotions and reckless momentum trading. Of course, it's always difficult to know how long it can carry on for, but history shows that time is NOT on your side if you betting for such trends to continue without a least a major correction. Here's another indication of where we are in the sentiment cycle when it comes to the US dollar. The cover on the left was in October and the cover on the right was from last week. My how times have changed so quickly.

Bottom line: Things feel really hopeless and there are clear signs of bearish extremes which you typically see near a major low, but you have to respect the market action which is not good and we can certainly make new lows here given the economic consequences of what Trump is doing and the damage in confidence he has created. Market action will tell you when the coast is clear and right now it's a hard no.  

Orange Swan

Holy shit. That pretty much sums up what's been happening in the market. After my last post, the market made a marginal new high before getting the biggest rug pull of all time. In my previous post I mentioned that if the trade war escalates again, it would create market turbulence again.  Well, it started off as moderate turbulence as Trump went back and forth making threats and then backing down/modifying them. Then he dropped the bombshell when he announced his "liberation day" reciprocal tariffs with his idiotic chart showing what tariffs other countries were supposedly charging the US, when in truth the "tariff" for each country was their trade deficit divided by imports.  This was far worse than what the market was expecting and the market has imploded since dropping 20% from the recent peak making this the 3rd bear market decline (20%+) in 5 years which is unprecedented. This weekend Trump explicitly stated what he has always believed going back 30+ years which is he wants to eliminate trade deficits with all other countries, due to the US being "ripped off".  Very few people, me included, thought he would go this far and this is why the market has collapsed. 

Noted tech permabull Dan Ives provided a very dire assessment to the consequences of these punitive tariffs which take effect April 9 due to the global nature of the supply chain for tech companies. It would also be terrible for autos and lots of other businesses. Trump just basically dropped a bomb on the economic plumbing of the world which took decades to develop all because of his boneheaded belief that trade deficits are bad, as it means you are being "ripped off". Trump, Navaro, Lutnick and the rest are clueless stooges.

Take a step back and look at the stats. The US is the most dominant, and arguably most prosperous country in the world. Median American real personal income has been in a  rising trend for decades and is one the highest in the world all while having a trade deficit every year since the mid 70s. "But it's unsustainable" is the rhetoric. Really? Why? Look folks. don't believe in the bs that Trump and Co. are spewing. Here's a simple example to understand why a trade deficit is not necessarily bad, and can actually be good. A real estate agent has a "trade deficit" with his assistant, paying him $50,000/year to book appointments, answers emails, do marketing, ect. This allows the agent to focus all his time on meeting clients and closing deals which results in him maximizing sales resulting in $400,000 in commissions/year. So, the agent wasn't getting "ripped off" having a trade deficit with his assistant. In fact, he benefited from it. If instead he eliminates this "trade deficit" and does all the work himself, he will have to spend a significant amount of time and effort doing admin and marketing himself, which means less time to spend meeting clients and closing deals. Also, he will probably not be proficient in doing the admin and marketing which will further decrease his deals. In the end, he is worse off. This is obviously a simple example, but you can see the point. By using comparative advantages, countries establish trade which in the end is a win for everyone in aggregate. Yes, I know that there's unfair trade practices (which should be addressed), and people can lose jobs to workers who do it for cheaper in foreign countries which forces them to find another job. It's not a perfect system, but it's the nature of capitalism which has led to the prosperity and standard of living we enjoy today which is far better than what we had several decades ago. Of course, there are still major problems we face today like housing affordability to name one, but again, look at the stats overall. Anyhow, I digress.Trump and his stooges wants the US the manufacture everything again. No chance that is going to happen. Tariffs or no tariffs, the economics don't make sense. And do they want Americans to go back to working in shoe and textile factories again? Come on man. It's asinine. With the more value added manufacturing jobs, again, the economics have to make sense. If you want those jobs to return, focus on tax reform and other incentives targeted to specific industries if it's feasible. 

Over the weekend a lot of folks including guys like Bill Ackman were begging Trump to reconsider these ridiculous, punitive tariffs, but he didn't budge and told everyone to "take their medicine". People are still holding their breath that this could all still be a big bluff as per Trump's Art of deal tactic of asking for the moon and then settling for less. It's obviously still possible as there has been reports that countries have reached out to Trump but I'm not going to hold my breath at the this point. This clown needs to be reigned in by his own party and that's going to require 2/3 of congress to vote on a bill that would cede Trump's power to issue these tariffs. That's a huge ask as it would require a significant amount of Republican senators to turn on Trump. Some have already start to consider it as they are being pressured by business and farmers, but again, I won't hold my breath. It would probably take considerable damage and time for them to act which by then would be too late. 

This is an orange swan event, I'm not going to lie, this has a 2020, 2008 feeling to this.   If I just look at the indicators, despite seeing some extremes, I also saw too much hope and desperation over the weekend which told me we weren't done yet with the selling.  To get a true washout you need to see capitulation.  I'm not sure if today's crash opening was it. The VIX did hit 60 which is obviously quite high and ticks the box of being an extreme, but keep in mind the VIX hit 80-90 in the GFC and Covid meltdown.  Today, even the safe havens of bonds and gold have been selling off. There's no place to hide.  I have a nauseating feeling when I look at the market. In the past that meant that a ST low was probably not too far off from a time perspective, but again, I won't hold my breath. If this post ends up marking the bottom or close to it, I will gladly accept this post being the ultimate contrary indicator, but deep down I don't think so. 

Edging

The markets have been resilient since my last post. After a brief dip earlier in the year, we are now a whisker away from new all high on the SPX despite all the hand wringing about tariffs. What happened on that dip was a mini-reset in sentiment probably as a result on the tariff drama and Trump's antics. I've had several clients express concern about Trump. My clients are Canadian of course, and I would say most Canadians despise Trump. I tell my clients what I often say here which is that the market is already aware of widely held concerns and thus will typically discount it quickly. It's the unexpected bad news which cause the big corrections/bear markets. Tariffs were largely anticipated from day 1. Yes, the degree of the tariffs were not necessarily fully factored in as there is some expectations that Trump was going to go in hard initially and then back off as a negotiation tactic. This appears to be playing out and is perhaps why the market didn't tank more than it did earlier this year. If however,a tariff war escalates a lot more than what's presently being expected, it will likely create market turbulence again. 

We now have a situation where the market is a stone's throw away from new all time highs, yet AAII sentiment is almost 2:1 bears vs bulls with some other indictors also showing room for bullish animal sprits to rise such as BofA bull/bear indicator at a neutral 4.7. No, it's not all all clear as other indicators are showing excessive bullishness. This is why I stated we saw a mini-reset in sentiment, not a full reset, but there's enough pockets of negative sentiment to provide fuel for a break out to new highs. 

Probably the most recent significant news event was Deepseek. There's a lot of debate about it but from what I gathered, it's a gamechanger and is bearish for the AI hardware providers. There's a lot of debate as to how Deepseek's impact will play out. I saw one video of this guy show how he was able to use  Deepseek on his own private, closed network at a minimal cost, thus avoiding the need for expensive cloud computing servers with data privacy exposures.

It appears we have a market that is edging. Just when I thought we were about to see a bullish euphoric climax, we instead saw sentiment back off just enough to keep the party going for a little while longer.   I had mentioned in my prior post that 2 major pieces missing to mark a bull market peak is IPOs and margin debt. Both have been on the rise but are not at extremes, especially IPOs. Perhaps this is what we need to see before the ultimate bull market peak in is. 

I've also see some quant studies which are pointing towards strong gains this year. So, does this mean I should ditch my bearish posture for 2025 and be bullish for 2025? It does suggest I be more open minded to this for sure. At the very least, it suggests I be more pragmatic and that the edging nature of the market suggests that the peak may come later this year or even next year. As usual, I will adjust if/ when the data suggests that I do.  I have no problem being a flip flopper. Folks, this is not about picking a side and being loyal to it.  This is not a fucking marriage. This is not a religion. This is about being on the winning side. Period. Fuck your ego, your pride and your dogma. Do what works to make money. 

Outlook 2025: Red flags a plenty

This is that time of the year when I look back and look ahead as to what might be in store. Looking back, a year ago at this time I pointed out how expectations for 2024 were low despite some chatter/hopes for a soft landing. At the time there were also still plenty of doubters calling for a recession such as jokers like Gundlach who had been repeating the same call since 2022. The median price target issued by Wall Street Strategists for 2024 was for a measly 2% gain. This low expectation environment made me bullish for 2024.  Not only did the market make fools of the majority but it even surprised the most bullish of the bulls and it did so with below average volatility. We had one, 9% correction in July and a  few 3-5% corrections.  Folks, how many fucking times do I have to remind you of the motto of this blog? It is there for a reason! In a nutshell, 2024 was a great year because we transitioned from the skepticism phase of the bull market to the optimism phase. But now we are seeing clear signs of excessive optimism and reckless speculation which is no bueno. 

I started seeing the first signs of excessive optimism in July as I had pointed out at the time. There's been plenty more red flags piling up since....where do I start? Positioning by fund managers towards equities and cash levels are near historical highs and lows respectively, which is the the opposite of what was the case at the depths of the 2022 lows.

Equity fund flows have been massive this year, especially since the election. On December 5th at the recent peak, there was about a 14:1 ratio of leveraged long vs leverage short ETF positioning. The last time this happened was December 2021. 

Just like in 2021, we are seeing ridiculous speculation in crypto led by charlatan Mike Saylor shamelessly pumping BTC saying stupid shit about how MSTR market cap will surpass Microsoft.  You have ridiculous meme coins like DOGE and fartcoin doing moonshots attaining a "market cap" of $1 Billion! Come on man. This is clearly a moment where you could look back a year from now and say "ya, that was a clear sign of an imminent market peak" because there is nothing more speculative than people trading meme coins, willing to gamble their money on pure air.  The fact that the action in fartcoin and other memecoins can even happen just proves what I've been saying about crypto all along....it is entirely a function of the greater fool principle. I will admit though, that I have woefully underestimated the degree and length of this crypto craze. As I had stated previously,  BTC had first mover advantage and so that's why it is more "legitimate" than any other crypto out there, thereby attracting the most money. But in the end, it is fundamentally worthless just like fartcoin and its value can only be sustained on faith and an ever increasing amount of money flowing into it. We may be at point now were a BTC crash could have systematic risk to the rest of market and perhaps even the economy...I don't know that for sure, but the risk of this is a lot higher than at previous peaks. 

Here's a survey which gauges the expectations of stocks by the average Joe...it's at the highest level ever. 

What about Wall Street Strategists? The median price target for end of 2025 is 6600. That's about an 11% gain from here. So, now these guys get bulled up after the market has risen 60% in 2 years and after being humbled 2 years in row calling for 5% gain in 2023 and 2% in 2024?  Lol. Talk about Johnny come latelies.  We've also seen capitulation recently from some the staunchest bears out there like Mike Wilson and David Rosenberg.  Here's what Rosenberg said on Dec 5 (right at the latest market peak) "The remarkable surge in the S&P 500 over the past two years has truly surpassed my expectations, especially in the last twelve months. Given that this bull market has persisted long enough, those of us who have found ourselves on the wrong side of the trade must consider adopting a different strategy. My latest memo is in no way a throwing in of any towel, rather an effort to discuss and interpret the message from the market that may not actually be altogether that irrational". Lol. Sounds like throwing in the towel to me!

We've also seen a massive underpermance of value vs growth recently and large cap vs small cap, a disparity which is similar to that of 2000. 

The rout in bonds has accelerated this trend in recent weeks but the growth over value trend has been ongoing for years. Bonds by the way, are being shunned which another major shift in expectations. Coming into this year most strategists were recommending to be overweight fixed income as expectations for several rates cuts in 2024 fueled by recession fears no doubt. Now, the expectations for bonds are the opposite of what they were last year at this time as inflation fears have come back to the fore. It's expected that the Fed will pause and cut perhaps only a couple more times in 2025. 

In prior posts I mentioned that a surge in margin debt and IPOs would be the tell tale sign of a major top. We have seen the former pick up but not the latter. I would also categorize the increase in margin debt to be not be as extreme as it was in late 2021...at least not yet. 

Then there is the BofA bull bear indicator. This is one of  my favorite indicators. It is showing a bizarre divergence from the vast majority of other indicators which are flashing red. Unlike most indictors which showed a burst in exuberance since October, this indicator went the other direction and has declined from 7.2 to 3.4 and may be even lower now!  

What is going on here? This indicator is based on global flows and positioning, not that of the US. The main driver of souring in sentiment is global fund flows, nemely,  massive outflows in China/emerging market stocks. In my October post I pointed out the opposite taking place and how my hypo-meter was flashing red for China.  Well, now that the hype has died down, I would say China and emerging markets are in a better position to form a base. Positioning in hedge fund and Long Only managers are neutral overall and even when the BofA indicator was at 7.2 it never hit the sort of extremes we saw in 2021 just prior to the market peak. So, in conclusion,  the BofA bull/bear indicator has not flashed red like the majority of other indicators I look at and is actually not far away from giving a buy signal! Remember though, this indictor pertains to global markets, not the US. 

So, in conclusion, there's plenty to be concerned about in 2025 as the wall of worry which propelled the bull market in 2023 and 2024 has all but crumbled.  There are bulls like Ken Fisher who still think we are still early in the optimism phase of the bull market. Sorry Ken, I can't agree with you here. Valuations are high, speculation is palpable and complacency has replaced concern. Back in July I postulated that we were in inning 6 or 7 of the bull market. Well, I say we are in inning 8-9 now. I'm calling for a down year in 2025, flat at best. There could however,  be pockets of opportunities in value, small cap, emerging markets and bonds. I will discuss this and more in my next post. 

Orange Optimism

I meant to post this earlier but I've been tied up. The election was a disaster for the Democrats as they were soundly defeated including a sweep in all the swing states. In hindsight everything is 20/20 as they say, but there was some writing on the wall hinting that Trump was likely to win due to the global shift towards the election of right leaning governments. People are tired of heavy handed government regulations/laws which impinged on freedoms and tired of mass immigration. It all started with the COVID lockdowns and vaccine mandates. Add to this the woke movement in which you had this fringe minority able to get a loud voice. I'd argue that wokeism was more prevalent in the US and Canada vs most other countries. These past 2 years, I got a clear sense that people were really fed up with this nonsense and were rebelling against it...and rightfully so in my opinion. The democrats did not appreciate or recognize this shift towards the right. They should have shifted more towards the center. Also, having Kamala as their nominee didn't do them any favors. She didn't earn the right to be there and did not have enough carisma. Being a women and of colour probably worked against her too.  The nasty, serial lying, convicted felon that is Trump did not deter enough people from voting for him even though he looks more unhinged than ever. Some smart people who voted for Trump like Bill Ackman downplayed Trump and his poor character by never mentioning it, emphasizing his team and the proposed policies of the Republican party. Imagine if you woke up from a 10 year coma and were asked who do you think would win a US president election a) a convicted felon or a b) a former district attorney?  lol.  

Leading up to the election night, the market had pulled back modestly. Recall in my previous post how I noticed the elevated VIX as a sign of hedging election uncertainty. I also mentioned that this tends to be wall of worry behavior which creates a coiled spring action once the uncertainty has been lifted. That's what ended up happening with extra emphasis given that prior to the election, a Republican victory would be viewed as bullish for the market given the 2016 "playbook". The big rally we got was accompanied by a big collapse in the VIX. We also saw crypto do a moonshot since Trump had been hyping btc. A lot of folks felt compelled to chase risk assets on all this Orange optimism. Count me out. 

Prior to this moonshot, the market wasn't sufficiently oversold and cleansed of the excesses I had pointed out in my prior post.  This post election rally reeks of emotion, fueled by hedges being dumped en masse. The other issue with this rally is the steep rise in yields. A prolonged trend of rising yields like this tends to eventually short-circuit an equities rally. Yields have been rising primarily due to inflation fears from proposed tariffs. 

The message I have continues to be one of patience. Chasing the market after it had a knee-jerk, emotional response placing it in an overbought condition, already up massively YTD, accompanied by hostile yield trends, is simply a very poor risk/reward set up in the ST. I don't give a fuck if the market just keeps going higher. I will not have FOMO.  

Best to be patient

Since my last post the market had advanced modestly by about 1.5% despite stating that the ST condition was not ideal. This has made ST conditions even less ideal, as multiple indicators show complacency/greed has increased further. However, there's a couple that are not, one of them being the VIX. With the VIX at 20 + it's quite overinflated given realized volatility has been much lower, The reason for the overinflated VIX is quite obvious - election uncertainty. Given how tight the race appears to be, there is some justification for this, but regardless, elevated levels of uncertainty tends to be wall of worry behavior and leads to a coiled spring action once the uncertainty is lifted. When indicators are conflicting like this, it's best to take a step back and evaluate the evidence in totality. The bearish indictors as follows: 

1. A string of low equity/put call ratios including Friday's 0.44 which is the lowest reading in 2 years. 

Given the current low reading of the 21 DMA of equity put/call ratio, history shows we are close to an intermediate term top. It also shows there's room for one more little push higher before hitting the top.

1. Massive equity fund inflows in recent weeks. 
2. NAAIM exposure at 90% long
3. AAII bears at 20% 
4. Fear/Greed index at 74
5. BofA bull/bear indicator at 7 - closing in on 8 which would be a medium/long term sell signal 

Let's look at the components that make up the bull/bear indicator

I'm not sure whether the 6 components have an equal weighting or not, but I believe the 3 most important components are the ones that have to do with investor behavior as per the motto of this blog.  Notice that the Hedge fund (HF) and Long only managers (LO) are at low levels of exposure, whereas as equity flows are  just about as high as it gets at 99th percentile. This is a really strange and rare divergence. On Feb 10 there was a similar condition where fund flows were very bullish yet positioning was on the low side of neutral. The market only got a drawdown of about 2.5% before marching higher.  This 99th percentile in equity fund flows is largely due to a record surge of EM inflows, i.e. people chasing Chinese stocks (more on this later).  

Let's look back at 2021, the last time the market hit a major peak and compare conditions to now. In Feb 2021, the BofA bull bear indicator had hit a peak of 7.8 and more or less hovered at 7 or above for most of the year. During this time there had been several occurrences where the  HF and LO readings were 80+ percentile including at least one instance where the HF exposure hit the 98th percentile and LO hit 100% percentile.. For the most part of 2024, positioning has been neutral  with only a few occasions where HF exposure hit 80+. With the market at all time highs and positioning from HF and LO underweight, it suggests were not in danger of hitting the ultimate top.  At the ultimate top, t's likely we will see an "all in" condition, not only with the BofA bull/bear indicator but probably other things as well such as IPOs and margin debt. What happens between now and that point is tricky because as previously mentioned, the ST conditions are redlining here. Ultimately,  I believe the market will make a significant move higher due to the unwinding of the VIX hedging and low HF positioning, but it seems difficult for that happen without a least a modest-moderate pullback first. Regardless, I'm not chasing the market here. I respect that it can just keep marching higher and so I won't stand in its way but I'm not chasing. I never chase. 

Regarding this latest rally in Chinese stocks, the current enthusiasm I'm seeing reminds me of the last failed rally of early 2023 when everyone was super bullish on China because of the end of lock downs. This time  lot's of people are stoked because of easier monetary policy and other government stimulus measures. Seems like a slope of hope bear market type rally to me. I know Chinese stocks are cheap but you can't make apples to apples comparison to stocks in free market economies not to mention the dreadful fundamentals of the Chinese real estate market which I doubt can cured by these latest "stimulus" measures. Admittedly, I don't have much knowledge of the Chinese economic situation but my "hypeometer" is clearly telling me to beware of this move. 

Bottom line is that the ST is sketchy as there is mounting evidence of an intermediate term peak coming soon,  but it's unlikely the bull market is in danger of ending just yet. Any upside from here is likely to be given back and thensome, but it's also likely that any pullbacks wont be deep given the wall of worry imbedded in the VIX and positioning. At most, I see about a 5% pullback once the peak is made. Am I super confident in stating this? No. Am I being too fixated on the ST wiggles of the market? Probably...

No shortage of doom analogs

In my last post I warned about a rug pull and that's exactly what happened. The market dropped 4.5% the subsequent week and this resulted in a sentiment reset as traders/investors ran for the exits en masse as per fund flows and positioning stats. The losses were recovered in the following week and then we hit new ATH yesterday, the day after the Fed cut .50.  Heading into the Fed meeting, the futures market was  60/40 in pricing in a .50 vs .25 cut. I was personally expecting a .50 cut.  Apparently only 10% of economists polled by CNBC were calling for .50...no surprise there. I was talking to a fellow advisor prior to the announcement and he echoed the consensus view that a .50 cut would signal a panic, i.e. that they know something we don't. This is nonsense. The Fed is simply catching up to the data. We've had plenty of evidence, painfully so, that inflation has moderated to the point where a 5.5% Fed fund rate is well into "restrictive" territory. The core PCE, the Fed's preferred inflation gauge has clocked in at a yoy rate of 2.6% for the past 3 months and add to that the recent soft non-farm payroll numbers and major downward revisions from prior months, it would be quite frankly, idiotic for the Fed to cut only .25%. Had they known about the downward revisions to payroll prior to their July meeting they probably would have cut .25% instead of doing nothing and so .50 cut is simply a catch up move. At 5% FF is still well above the neutral rate and so the Fed  has cover/justification to cut .50.,,, the FF should already be at 4% is you ask me. 

After the Fed announcement there was no shortage of hand wringing on twitter. If I had a dime for everytime someone made a reference to 2001 and 2007 I'd be a fucking millionaire.  Here's a few excerpts: 

"Today was the first rate cut of 50bps since March 2020, let's look back at rate cuts when the market was near highs in 2000 and 2007". 

"The last 3 times the Fed started a rate cut cycle with .5% was 2001, 2007, 2020"  

"Fed only cuts rates when the economy is in the gutter or about to go in the gutter. The fact that they did proves my point that we are in recession"

These types of post were flooding my "for you" page on twitter. If you're in this camp, you are in consensus. Please make note of the motto of this blog. The current doom analogs remind me of all the analogs in 2022 that compared the market to 2008. After the COVID crash it was the 1929 crash analogs were all over twitter. What you will hardly see on twitter are mentions of  1984, 1995 and 2019 whereby Fed cuts did not signal an immanent recession and were instead recalibration cuts. IMO, this is the most likely scenario we are dealing with here....at least for the next year or 2.  The economic conditions in the US although moderating are still healthy overall. I'm sure you can show me some stats that suggest otherwise but there's ALWAYS something negative you could point out whether it be this year, last year or any other year the economy was in expansion. Corporate profits are  healthy, layoffs are hovering near historical lows and credit spreads are calm....NOT something you see when there's an imminent recession. Also, private and corporate leverage is near 30 year lows. Before you point out rising credit card debt, please look at the trends in overall debt including mortgage debt which makes up 70% of  the total and make note of the percentage of disposable income being used to service all debts in the US - it's 9.8% which is at a 40+ year low. You will find similar benign stats regarding corporate leverage. Oh, but look at the huge increase in government debt! Yes, that's true, but government debt is not the same as private debt as governments have something you and me don't....a printing press, but that's a discussion for another day. For now, just look at Japan to see how far things can go with their 250% Debt to GDP ratio. 

The main message of this post is that there is plenty of moaning and worry about this rate cut cycle. Fears of a recession are acute and that suggests there is still a healthy wall of worry for the market to climb longer term. What happens in the next few weeks is probably more volatility. Once again, in the very ST, conditions don't look ideal but the more medium term indicators have cooled off/reset notably compared to how they looked like at the July market peak. If we get another bout of downside it would probably recharge the medium term indicators even more putting the market in a position to make a significant upside breakout later this year.