Big, fast moves never end well

This bear market rally has extended which means we are in a higher degree retracement. Which also means that whatever comes next will be even nastier than even I expect. On a percentage basis the SnP has rallied 13% plus from the 3639 low, exceeding the 12.8% rally back in March. I gave up some of gains from my highest point a month or so ago, however I am still up around 70%. So good luck to the Perma bulls who were down 60% but now only down 45%. lol. To their credit sentiment has clearly shifted in favor of the Bulls, which paradoxically, is required before a nasty plunge can begin anew.

It’s hard to say where this rally ends up. Wave “2” rallies like this can retrace anywhere from about 38.2% to 78.6% of the previous drop using Fibonacci levels. We could easily collapse Monday or can extend a few percent higher over the next week or two. If I knew I wouldn’t be sitting here, lol. My way of managing this is to layer in new shorts as we go higher, just like I take off shorts when we have a big dip. For example, when we dipped to 3639, I took off about 20% of my position. I have since re-added and am currently shorter now than I have ever been, but I didn’t re-add all at once. Some at 3850, 4000, 4100 etc.

You get the point. Let’s see what happens next week. Have a good weekend!

Desperate Bear Market Rally

As is typical, equities like to attempt a final desperate move up before a plunge. Historically, what this usually looks like is a quick 8-10% move from the previous low. I contend we are in the very late stage of such a move from the recent /ES 3639 low, sitting currently at about /es 3970. There is a gap above in the 3980-4020 area, and the market would love to close that in order to maximize pain for bulls and bears. I am so far up in my positions, however, that I am willing to take on more risk and cannot add new short positions fast enough both yesterday and this morning. In other words, we may go a bit higher which would completely unsurprising (like the entirety of this rally), and I don’t care. The risk/reward is still in favor of significant downside. The notion this time around fueling the rally is that the Fed will pivot sooner rather than later due to recession risks outweighing inflation. I disagree with this completely and believe the Fed is boxed in, especially because they have taken a measured approach to rate hikes and its balance sheet unwind.

I think this will be a story I tell my grandkids about, God willing. Until then, happy hunting (trading).

Initial downside targets

It would probably help to put some targets out there for this next plunge which I project to start shortly. Currently we are trading down today about 1% on the SnP, although it is not clear to me this is the start of the next big leg down. It could be, or the market may oscillate and drift higher for another week or so. That said, for this next move, I expect a drop to SnP 3300ish (/ES futures), Dow 26k ish (YM futures), and Nasdaq 9500ish (/NQ futures). These are approximate values, and of course things could evolve, and one must be nimble. I expect markets to go much lower in the mid to long term, losing 75-90% of their value from peak to trough (SnP 400’s?). I also don’t expect a V shape recovery from this bear market.

Any number of things could trigger the next wave of selling. June CPI on 7/13, Russia gas cut off to Europe next week, China/Taiwan etc. One can only speculate. However, the main reason and underlying driver will be economic plus two additional “extraneous” trends rarely mentioned in the press. The economic drivers are straightforward, i.e., top line sales pressure from a weakened consumer who must spend more on food, energy, shelter versus other items, bottom line pressure from higher input costs due to inflation, and a higher cost of capital. Other factors are 1) government meddling in various sectors (oil, media etc.) and 2) the bifurcation of US in general where the culture wars drive folks to spend money or not spend money based on political reasons. The latter is rarely mentioned, but I believe to be a macro driver of segmented and reduced spending in many areas of the economy (i.e., go woke, go broke).

More pain ahead

Just want to touch base as I haven’t posted in a while. Nothing has changed on the economic and political front. Chaos reign everywhere as hyperinflation ravages the globe and government bodies and leaders repeatedly make things worse with their “solutions” (e.g., price caps). Some folks are experiencing a frog in boiling water effect while others are impacted acutely (truck drivers for examples). Most don’t know what is happening, or think it is transient, and will be destroyed financially in the coming years. The bottom line is the Fed continues to be stuck in a liquidity trap of its own making and is attempting to raise rates into a recession in a mid-term election year. Not an enviable position. The point that most people miss, however, is the Fed is actually more worried about placating markets than controlling inflation, in spite of what they are saying. Consider this. The Fed needed to leak a press release for a 75 bps hike last month instead of 50 bps after headline CPI hit a new cycle high north of 8.6%. If the Fed were serious, they would be hiking at least 100-200 bps each meeting with inflation this high. And nearly everyone knows that with CPI nearly 9%, actually inflation is roughly double that. The Fed is also “slow playing” its balance sheet runoff, selling only 45B a month out of a 9T balance sheet. In spite of that, the bond market had its worst first half since 1788. Wow. All that said, and with the continued backdrop of commodity scarcity, expect more pain ahead. A waterfall decline looks to be imminent (next week or so). Ignore the rhetoric about a Fed pivot. They may pivot at some point, but they have just begun tightening and will lose whatever credibility they have left if they try to pause too early with inflation raging.