Good afternoon, traders.
The S&P 500 is little changed, so there’s nothing I can add that goes beyond what was said yesterday. I continue to believe that this is a countertrend rally in a long and exhausting bear market. We may observe the 3-wave advance (if that’s what it is) as an A-B-C with a triangle in the middle:
We may even have a little topping formation in the works now. There’s no requirement for green C to be done here, which is why I will let myself get stopped out on another advance, but since I expect lower prices once this is done, I am still looking for places to sell, not buy.
Now I will sometimes save some of these longer-term thoughts for a weekend article, but I will add these tonight instead.
As far as bear markets go, let’s just assess some things in a general way. We know we had a huge ballistic advance after the unprecedented central bank interventions from COVID, CBs persisted with their feet fully on the gas until they caused inflation (obviously, an argument can be made that this can be caused as much or more by fiscal rather than monetary, etc.—but that detail isn’t important for now). But once they finally became alive to our new problem, they’ve all panicked in the other direction and they’ve mashed their feet on the brakes. And in the midst of all this, what would you expect stocks to do? You’d expect them to be harmed. But they only managed to fall in a choppy mess in 2022 and have since almost fully recovered, with big tech booming like we have ZIRP and full-bore QE. Such strength in big tech is really weird given the CB policies right now. We can make all sorts of arguments about the causes of this: passive flows, bond market, tail wagging the dog via the options market, all sorts of things. But I’m a firm believer that what ultimately causes all of those is institutions. They’re the real movers. It’s their market.
So we have to ask, why would they do this? We can look to good examples of bearish declines from our lifetimes and stocks fell (early 2000s, GFC, etc.). Here, they just keep being re-supported again and again and again, with some—like Apple, Microsoft, Nvidia and some others—even going on to make new all-time highs in this environment.
One of my best calls—going on a year-and-a-half now—was that I believed we firmly ended a bond bull market that lasted decades, and that we have entered our first bond bear market in ages. That became clear to me when we launched on this trend line instead of rejecting it:
Now I don’t really know what to expect in the end, but I expect this to take a lot of time. Years. In the course of that, I don’t think stocks will do well, or not like they have in the period leading to this. In other words, we should expect a regime change to take place: the things that have done well will do poorly, and new things will do well. But here Microsoft sits happily at new highs again.
And so here’s my thought. I may have an idea about what institutions will probably do or not do, that part’s roughly intelligible to me. But what’s really hard for folks like us to really get a handle is not so much what institutions might do, but rather, how long they might take to do it.
You and I can place our trades, hell probably close whole portfolios in an afternoon or less. And it’s hard for us to grasp what they’re doing and how they’re doing it. The fact that we keep feeling supported over and over again tells us one of two things: we’re either in an extremely tedious consolidation in a super-secular bull market that isn’t complete, or, and that’s right folks, we’re in an extremely tedious distribution in the mere opening days of a true, bona-fide secular bear market.
And what will wet the panties of all the bears out there (like me lolz, but let’s not talk about my panties please), is that both the dot-com bust and the GFC were relatively brief: I think those were cyclical bear markets within a secular bull market.
So, my point of all of this is:
So if we ask strange questions like, “WTF is happening,” I think maybe things are unfolding exactly according to plan. Institutions move slowly and it’s hard for us to comprehend that on a day-by-day basis and especially on an intra-day basis. None of us has experienced anything like a secular bear market in equities, let alone any bear market in bonds. And what higher interest rates should bring about in the world of equities is just taking a long time, because that’s the speed institutions are moving at here: a big, slow, regime change in the land of equity leadership. Hell, I don’t know, maybe energy stocks take the lead in the end, who knows.
But, looking at it this way can help to explain some of the tech strength here: all part of much larger patterns of distribution unfolding slowly and patiently. But to expect tech to lead us again in a renewed bull market seems difficult to believe given the macro picture here—it’s not something I am eager to accept.
So, let’s see how some of our local structure play out. I think we are slowly going to see a shift into some very wide “channels” and everybody will get to eat. Secular bear punctuated by cyclical bulls, but for some years, all as the bond bear market unfolds in a slow, methodical process (with no doubt some fast parts).
I hope everyone has a fine evening.