Sectors Relative to QQQ

Sector Funds vs S&P 500

Real Estate Gap Gap

IYR Still an Island

An island reversal is a higher confidence signal, and one is more likely should IYR gap down tomorrow. MSFT and GOOGL will decide it.

If It's a Bear

Looking at the potential island formed in IYR. if this is a bear market, the odds of that resolving bearishly are higher, and the odds of an island reversal are higher. Something to keep an eye on, if only as an indicator. I added puts on it this AM.

Shorted Again

Covered energy, then bought puts at lower strikes. Was long QQQ for a bit, made a small profit. Back into IYR,XLV shorts, added IWM because I closed most of my puts earlier today. Crazy day! Could go long, flat or stay short. I shorted when the ES got back to 4250, it went a little above, and I bought puts on IWM. Still holding those. Update: Flat and done for the day.

Who Is Buying and Selling?

All the action today says bearish to me. I called the top on Saturday and nothing has dissuaded me. Utilities, consumer staples and real estate SPDRs are each up 1.50 percent or more with 30 minutes left in trading. This is bear market activity as I showed in the weekend post. The best case for bulls is this represents some pre-Fed nervousness and the whole market will shoot higher on Wednesday after Powell fails to credibly confront inflation.

I wonder who is buying and selling at these prices though. There is a lot of ink spilled on the topic of inflation being bad for stocks, yet shorts are near an all-time low. I'm sure options trading has picked up, but most of that is short-term neval gazing around derivatives of derivatives such as gamma. Are traders stocking up on 20-percent OTM puts on stocks while VIX is cheap? (I'm pivoting in this direction for 2022.) I sense not. Who has been buying a stock like Apple? I'm confident the "defensive" buying is fund managers dealing with inflows. Again, going back to my bear post this weekend, my sense is the defensives lead until the money flows stop, and then everything goes down. '

If I had to buy—I don't and won't— I'd be in consumer staples and then utilities, because I think the former have better pricing power aka bullish narrative. I saw this dirty diamond in WEC Energy (WEC), an upper Midwest utility.

Here is Proctor & Gamble up about 10 percent in the past two weeks.

Coca-Cola (KO). Is this the inflow/Santa Rally?

Inflation Bu Hao, Very Bu Hao

If you want to know why I'm bruised, but as excited to be shorting as I was a month ago, I give you exhibit A. If you want to know why I think inflation can wreck stocks fast, here is the real earnings yield on stocks and the 46 percent bear market from 1973 to 1974 and the bear market low of 1982 and the fact that today's earning yield is lower. Now you know why ARKK holdings have been annihilated. Stocks with no or low earnings, with a lot of hype about back-loaded growth get traded like a 30-year treasury bond. The whole market is devaluing in real terms and investors are still bidding prices up on an inverted assumption about the direction of prices under higher inflation. I can't imagine a better setup with reality and assumptions so completely divorced.

Bloomberg: BofA Says S&P 500 Real Earnings Yield is Lowest Since Harry Truman Was President

The S&P 500 Index currently has a real earnings yield of -2.9%, meaning that without continued growth in company results, investors would lose 2.9% when adjusted for inflation, the strategists led by Savita Subramanian wrote in a note on Wednesday. “Last time the real earnings yield was this negative was 1947.”

In each of the previous four times that real earnings yield was negative, a bear market was the result, according to the strategists, who advised investors to seek refuge in inflation havens, such as energy, financials and real estate. Expectations that inflation will moderate from 6.2% to 2.5% over the next 12 months may prove too optimistic, as that would imply the sharpest drop in four decades, they said.

I don't think any of those will prove to be safe havens, at least not initially. Natural gas and producers are an exception because it can be uncorrelated. I do think enegy will greatly outperform, but energy stocks may also fall in price in a bear market. I'm increasingly biased towards holding futures on the commodities. I could be wrong about energy stocks, I'm not pounding the table there, but I would be surprised if energy stocks went up in a bear market. (I'm also still leaning to the first wave of a possibly decade-long churning bear market to come via deflationary forces.) Actual physical real estate may hold up and REITs may outperform relative to stocks. Financials could get wrecked if the Fed loses control and inflation is higher for longer, and long-term rates rise too quickly as a result. Maybe I'm wrong about financials because in relative terms it looks undervalued compared to the S&P 500 Index, but as a bear, that only makes me think the losses in tech are going to be insane.

International will probably be a bloodbath to start if the dollar goes higher.

Energy,Spain,Peru Reverse Breakouts, China,Steel, Coal Intact