Does the Yield Curve Matter?

Nasdaq Rebalance

US funds hit limits on holdings of high-flying tech stocks

Major asset managers and mutual fund specialists such as Fidelity, BlackRock, JPMorgan Asset Management, American Century and Morgan Stanley Investment Management have run into strict regulatory limits that determine whether a fund can be categorised as “diversified”. The trend is a further sign of how a lopsided rally powered by just a handful of big companies is creating unexpected issues for investors and index providers, and follows news that even the Nasdaq 100 — the index most closely associated with high-flying tech groups — will be rebalanced to reduce the dominance of the largest groups such as Apple, Microsoft and Nvidia. The S&P 500 has added 18 per cent so far this year, but seven large tech stocks have accounted for the majority of the gains. Mutual funds that register with the Securities and Exchange Commission as “diversified” cannot put more than 25 per cent of their assets into large holdings — with a large holding defined as a stock that represented more than 5 per cent of the fund’s portfolio at the time of investment. Funds are not punished if the value of their existing large holdings naturally rises past the 25 per cent limit, but once it is hit they cannot buy any more of the affected stocks. At the end of May, Fidelity’s $108bn Contrafund, for example, could not buy any more shares in Meta, Berkshire Hathaway, Microsoft and Amazon, because they made up a combined 32 per cent of its portfolio.

I covered this topic several times last year, most recently here: Why You Shouldn't Own Apple Stock and even more recently on the Substack: Me in April: Microsoft Done, QQQ Fails Diversification Rule

The Nasdaq 100 will undergo a rebalance because of this issue. My view is this is the sign of a massive market top. Last time this became an issue, the market solved it in March 2000. That this is going for almost 5 years now, going back to the 2018 major sector shuffle, indicates this could be a far larger top in time and price. The alternative explanation is the United States is becoming a techno-fascist country with emerging market qualities. For example, Taiwan Semiconductor is around 40 percent or more of the Taiwan market capitalization.

Take the Quiz

Social Awareness poll: Without cheating, what was the inflation-adjusted capital gain in the US equity market for the 75 years following the 1906 peak. Recall how much wealth was created in that window.

— Dave "Rent this Space" Collum (@DavidBCollum) April 12, 2023

After checking the result, I looked up dividend yields and calculated the compounded return. Then I looked up historic dividend yields versus bond yields.

Projection? Wall Street Says Bears Hoping for a Fall

ZH: JPM: Wishing This Market Lower Is As Frustrating As Holding A Beach Ball Under Water

The above is a premium post at ZeroHedge, but comes on the heels of a relentless string of very bullish calls from all over finance. Not only are bulls bullish, but bears also are talking about a melt-up. This JPM headline makes me wonder if Wall Street isn't trying to dump as much as possible though. I can only speak for myself, but I don't hope the market will drop. I get that there are technical rallies. What I do not see here, is how the bond market rallies on a Fed pause or pivot when all signs I've seen from financial markets tells me commodities such as crude will rip higher if that happens. Additionally, I'm seeing gold behave like it maybe wants to crash afterall. Shouldn't it rip higher on a pause or pivot, since logically that would mean future real interest rates will drop? Real rates will rise if inflation falls and the Fed holds the line, but if that level of real rates is priced in, a pause or pivot should cause a bullish repricing of gold.

Stepping back a bit, about the only market "signaling" a pivot is the most solipsitic one: stocks.

Anything can happen in markets. Anything. Maybe bears are focusing on gold and copper instead of stocks because of the strength in stocks. Maybe bulls are focused on stocks and that's causing a divergence. Maybe bulls are right and the Fed will pivot or Powell will touch his face in a way that means stocks go up 10 percent. Sentiment is funny, that's why you have to pay attention to how stocks react on news items. The market is clearly in a very bullish and optimistic mood at the moment. I look out over the coming months and even years, and do not see how the Fed pivots or pauses. If anything, I expect the opposite. If they ease too early, they'll blow it the same way the 1970s Fed did. The risk of stagflation would climb. Bonds would eventually reject the pivot and sell off, forcing the Fed to chase the market interest rates.

In the 1970s the Fed cut rates midway through the recessions and that was the wrong move. Not repeating would mean the Fed hikes rates until a recession is evident (the recesion will likely be backdated) and then refuses any rate cuts or moves very slowly such that rates are still high at the end of the recession.

To sum it up, I don't hope for a fall. I don't see how it can rise for very long and if it rises, then it's more profit for the bears on the eventual downswing.

Will Hussman Finally Be Proven Correct?

I see many many bullish articles coming out now, calling for a meltup into next year, calling for a new bull market after the first half of next year. One of John Hussman's models called for negative 2 percent annualized returns (the chart below) and currently sits at 0 percent expected return. A negative 2 percent run from 4800 comes to 3767 in 2034. Zero percent from where it sits today. Considering stocks rise in most years and there will be 20 percent and 30 percent return years following the bear market low...there's still a lot of downside if he's right. In the short-term, bullishness is possible, but value mostly lies outside the United States.

Estimating Downside Market Risk

The Bear Flashes Its Teeth

This post will be slightly more speculative and long-term looking than before. More thought experiment laying out some scenarios than a hard prediction. Three weeks ago I posted What's Next for Markets. I laid out a few scenarios. At the outset, I wrote:

Many traders are looking for a low around the 3500. Some are short-term oriented, but others have that as a long-term target. The 3500 level is only 5 percent away. I will ride a position down to 3500 and might take very short-term trades, but overall I wouldn't be looking to short here if I thought 3500 would be the final low. There would be more to be made by buying at 3500 and riding the subsequent rally.

My mistake this week was not trading the 3500 level. I took some profits, but I didn't put on any long trades as I did back in January and that would have proven very profitable over one day.

To summarize the rest of that post, a low here is a double-bottom. Hindsight being 20/20, I'd label that June low as the end of wave 1 of the bear market. An A-B-C correction has started with A into August, then both B ending and C starting on Thursday. An alternative was this is Wave 3 and a decline down towards the 3000 to 3300 area. Something probably breaks on this wave such as a shock yuan depreciation, high profile bankruptcy and so on, that triggers intervention. Not necessarily a Fed pivot, but something more substantial that the Bank of England's actions. Looking at events, the Asian Crisis of 1997-1998 can serve as a guide. The Thai bath starts breaking in summer 1997, but it isn't until late summer 1998 that Russia defaults on its debt and Long Term Capital Management goes bust. In this scenario, we get something of a climax in the U.S. dollar rally for now before the final fireworks later next year.

As I read over the post, now I think it is possible a new low here could be more like an overthrow of Wave 1 because I believe this bear market is far larger than understood by the mainstream. I don't think a new low has been made yet. I made this chart yesterday showing how the market behavior since June is like a complex double bottom.  Attempt at a new low at one triggered a big short squeeze. Another attempt at two triggered a huge short squeeze. The market has only spend about 4 hours below the 3580 level, and that level is only 1.6 percent from the June low. Bulls will love hearing that because it means the market is way too bearish. This market is actually very strong because it hasn't really broken lower since June. The bear reading is lots of stocks are at meaningfully lower levels and they're leading the indexes. 

Using Elliot Waves as a guide here, a move to say 3000 is not a Wave 3 considering it would be only 600 points as compared to the 1200 points lost into June. It would be a 25 percent drop from the August top, matching the decline into June. To the point: if this was somehow a Wave 3, then this bear market is getting long in the tooth and likely to end sometime in early 2023. I don't like that timeframe right now, hence my thought that this is probably still Wave 1.

I don't want to go into the weeds with this because what's more important is where I expect the market will go in the days and weeks ahead. I still think a new low is incoming. If I'm wrong I'm wrong, but right now that's all the matters. The target is still 3000-3300.

Doomed Markets

If you're an active investor or trader, or enjoy following the markets, then you no doubt see a pronounced bearish shift in the sentiment. There are sentiment indicators showing bearishness. In my opinion, most of these people are not bearish or are not bearish enough. Example: I'm a little surprised at how many bears own stocks. Many people are trading with a small portion of their assets and hedging their long exposure. I own almost no stocks. I sold most of my holdings before this top was made. The only things I retain are natural resources stocks such as gold, copper and zinc mining (and a few remaining DRIPs that aren't worth the paperwork). I've sold down many of those miners, but in my opinion, they are more likely anti-stock trades because they will do best under stagflation or high inflation that will devastate the broader stock market. Most of my money is traded at the moment and most of it is bearish.

To explain the scale of what I think is coming, I think stocks are like Beanie Babies. It's the go-to investment idea for most people. The 401k and IRA are always put into financial assets unless an individual takes personal ownership and does something different with the money. I expect a lot of people currently working in finance will be unemployed in the coming years. Advisers and managers who ride this bear down will see the asset value under their care fall 40 percent to 60 percent from losses, and then add on all the clients that leave. In 2008, bonds rallied strongly. An investor who sat in a 60/40 portfolio from the top in 2007 to the bottom in 2009 saw bonds rise as stocks fell. SPY fell 54 percent and TLT rose 22 percent, making for a net loss of 23.60 percent. Not fun to see, but not world ending. If cash instead of bonds, 32.40 percent loss. 

An investor who was 60/40 in SPY and TLT this year is down 27.20 percent. If they were in cash, they're down 14.40 percent. TLT isn't the best comparison because it has underperformed the S&P 500 Index this year, instead of outperforming by more than 70 percentage points. Most conservatively invested portfolios are down more like 15 to 20 percent this year. Still, from my perspective of this being the end of round one, the potential losses will be much greater. Moreover, time is a factor. Most people in 2008 didn't start dumping stocks until the market started panicking in 2008. There hasn't really been a panic yet. Most investors have been trained to sit in stocks. If there is a panic now, redemptions and sales among retail investors and 401k holders will start. If not, then it might be well into 2023 and during the next wave down, which might mean close to 40 or 50 percent losses from the 2022 top before real selling kicks in.

Casino Players

Most of what's been going on this year is casino action. Broken markets 2.0

This market is becoming more and more broken by the day. A month ago we referred to Goldman's latest observation on just how extreme short term options trading had become. We wrote: "Close to 50% of options volumes are in contracts with a maturity of less than 24 hours. The greeks that arise from such short term options are very hard to hedge given the current liquidity in the underlying market. Erratic markets at its best..." This is a massive problem for any market, but especially for a market where underlying liquidity is evaporating (chart 2). The options monster has become huge and you can't tame it....

Let's make this as simple as possible. Squeezes like we saw on Thursday are "happy" events with a nearby terminal point because eventually all the bears are gone. They are a minority of the market and lack asset scale. It doesn't take long to blow them all out. The flipside of Thursday is a crash. On a short timeframe, there is really no bottom for a crash because bulls are all in. They are the market. Everyone is watching their account values implode. The market has circuit breakers, but only if the market falls 20 percent will it close.

The above article also says things such as "investors are cashed up." Investors who sell stocks and leave cash in their account are wannabe bulls. When this bear market is done, investors won't be cashed up. They will have cashed out.

End Games

Everyone knows the endgames of the dollar imploding. They may not believe it possible, but they understand how deflationary panic can collapse asset values. Another less discussed scenario is the Fed pivot to destruction. During a twin panic in stocks and bonds, the Federal Reserve does something like a restart of QE. Except commodities haven't collapsed much. Stocks and bonds rally immediately, but so does oil, copper, wheat and so on. Then something like what happened on Friday begins in bonds. They start selling off hard. The rally in commodities picks up steam. Suddenly bonds are back to crashing. The market has decided it doesn't like QE anymore. It knows where it leads. What does the Federal Reserve do now? It immediately reverses like the UK government did with its budget this week.

The deflationary panic that most investors believe impossible will arrive for stocks. Or a bond market panic that devastates financial asset valuations will unfold. People who lose in this collapse will never buy stocks again because as with the Great Depression, the markets won't recover for a couple of decades. They're already be old by the time younger investors are wading back into the market.

Almost everyone I see is some form of bull. The majority of "bears" are buying up precious metals, cryptocurrency and commodities. Many stock bears have a minority of their assets in bearish positions. Many people say they are bearish in sentiment surveys, but they haven't done much with their portfolios. They think stocks will recover because they "always do." Those who have sold a little have raised cash and probably already dip bought some stocks. "Netflix is so cheap!" they think, because they can't comprehend companies of that size losing 90 percent of their value from the top. 

Stepping away from markets, look at the society. Americans feed children "puberty blockers" which are very powerful hormone pills used for people with cancer. They are not approved for children. Puberty blocking is a thing in history. You may be familiar with the castrati and the Chinese eunuchs. These pills permanently destroy children's' bodies. 

This same society punished doctors and banned anyone who spoke about using a safe drug, ivermectin, for treating coronavirus. Whether the drug worked or not, people were censored on social media because drug companies would lose their legal immunity if there were other treatments. Government vaccine mandates would be illegal if there were effective treatments. Many people probably would not have taken the shots if they thought there was an alternative, costing pharma companies billions in profits. The shots were said to prevent transmission, but this was an obvious lie because early tests showed the "vaccinated" were spreading it. Now it is revealed there was no evidence that the shots stop the spread. 

The masses of the West are mindless robots who flip political opinions based on whatever the television and social media tell them. They are simultaneously screaming for shutting down the Western economies to fight climate change while agitating for nuclear war that will glass the West and Russia, maybe China too. Perhaps they are consistent in seeking mass death to lower CO2 emissions, but is this a society you want to be long of?

Extend this corrupt and irrational thinking into markets. Look at this item from Yahoo Finance's Twitter account: 

Chipotle was given an ‘outperform’ rating by Bernstein based on the company's social media strategy on TikTok.

We can debate how deeply this stupidity has infected the investing public, but I am 100 percent certain the vast majority of people don't realize current market valuations are supported by morons. If I'm allowed to count people such as Cathy Wood among the idiots, then I'm 100 percent certain there is more money managed by morons than by bears.

When thinking of financial asset valuations, I'm reminded of the Seinfeld episode where Kramer pumps up Elaine by telling her how he's gone on to dominate his karate class. Later she learns the truth:When people realize how badly they've been hoodwinked by Wall Street, central banks, their own governments and their own stupidity, then the market will reach a bottom low enough to put long-term capital to work. We're a long way from there.

Random Thoughts

It is said that rate hikes do not help high oil prices. Do rate cuts?

You can't print oil. Aye, and what does currency printing do in this context?

Home prices climbed 42 percent since the pandemic according to Case-Schiller. Home affordability is at all-time lows. Assuming lockdowns damaged the econmoy, why should's prices fall 30 percent back to the pre-covid level?

For 12 years, the Federal Reserve suppressed interest rates and thereby indirectly funneled hundreds of trillions in capital into unsustainable projects and investments. Higher interest rates are the solution, no?

Why shouldn't the strongest companies and countries set their interest rates higher so as to attract scarce capital?

Short-term: if the U.S. dollar is peaking, where do commodity prices go? Inflation? Interest rates? Long-term: same questions, but also what if the dollar hasn't peaked for good yet?

The End of the Beginning

I'm running my portfolio like a targeted fund. I don't have a name for it, but let's call it Bear 1. I suspect that my "fund" will close this week or the one after and be replaced with Bear 2. Think Elliot Wave for the numbers.

I don't want to go through all the lessons I've learned this year yet, but there are a few relevant to this coming week or two. The most important lessons were simply experience. I didn't start actively trading until around August 2018. As that correction was completing, I realized options were a better strategy. Then I lost a lot of money, with some profit mixed in, in 2019. Then I made a lot in March 2020, but gave much back. I struggled until late 2021 when I starting hitting big wins, such as 20x returns on weekly XLE puts. And I didn't know what was happening and gave most of it back. I did it again in January 2022. I 20x'd my entire main portfolio. And gave it back almost immediately (literally within a couple of days it was halved).

I don't want to get into what's happening now with my portfolio because it jinxes it. I held off on discussing profit many times and literally the one time in each case I did it, that was right when I should have gone to cash. I want to discuss this now, however, because I think another moment is coming up. If I'm 100 percent wrong and the market reverses immediately next week, I need to get out and protect what profit I can salvage. If I'm right and the market starts selling off, I suspect it is days away from a final low. The low should be in before October 21 opex.

There are two ways to deal with my trading errors. One was to decide I'm a degenerate gambler who belongs on WSB and the other is to find a hand that can tap me on the shoulder and say, "We're done here." My frequency of hits and profit told me I was adding value with target selection. I went with the latter option and subscribed to trading service that focuses solely on direction of the major indexes. 

Another thing I learned is I can find high profit targets if I'm on trend, and if I have taken enough time to find them. My other main mistake was to keep trading when I should have stopped and reassessed the market. I was prepared for the rally from June to August, but I wasn't prepared for the rallies before.

Which brings me to the point of this post. Unless you're a daytrader, you should be mentally preparing for the coming rally. I won't say there are no profit opportunities, but if you haven't been trading to this point, then it's too risky to start now. You go into the panic low with the portfolio you have. If everything goes according to plan, sit back and do nothing except wait for the bottom signal.

My one caveat is energy. My opinion and I have money on it, is that the market can't rally unless energy sells off. If you tell me I'm wrong and oil is going back over $100 per barrel next week, then my assumption is the market will panic even worse than I expect because there can be no pivot if oil is already ripping higher. I can be wrong for days and weeks, maybe even months. However, if I'm wrong for months and oil rips towards $150+ as stocks and bonds surge, then I suspect 2023 will go alongside 1929 in the financial history books.

My break with the wider financial community is their assumption that the Federal Reserve is driving rates higher. My hunch is that interest rates are going higher because they must after years of suppression. The Austrian School has the right idea about capital: there's a relatively fixed amount of real capital. (In the short-term. Over the long-term, growing the capital base is what generates wage growth and deflationary trends in prices if not for central banks.) Inflation and interest rate suppression distort price signals, leading to malinvestment. 

I see many smart analysts and investors who know that green policies and Russia sanctions are a disaster, that commodities markets are wrecked and only made worse by green policy, and yet blame the Federal Reserve for raising rates because it doesn't solve the energy crisis. Yet I ask, "Do lower rates solve it?" The Fed's only real mandate is price stability. Kill inflation. If crude oil is going higher for structural reasons, then the Fed must be on high alert for inflation because high energy prices are a very possible catalyst.

The flipside is that if the Fed is wrong on policy and they're the source of trouble, then energy should crash in the coming deflationary wave. Simply, if there's to be a large rally, it should be the inverse of 2022: stocks up, energy down.

Bear 2

If Bear 1's work is do nothing, Bear 2 is find targets. I have some profitable ideas in mind and trying to find more. Figure out how much I want to allocate for possible 0 or 1 DTE daytrades if a crazy reversal V-bottom happens, versus buying calls into January or March (bull moves always seem to take longer than I anticipate).

I expect biotech, as one example, will perform even better than it did this summer.

There are also cyclical signals. I wrote about the won and yuan tumbling this summer. The dollar could have already peaked and it could reverse counter a bottom in stocks, or a major blow-off rally to end this phase could be coming. Either way, it's likely the dollar will soon be topping out for at least a little while.

Where will oil and inflation be next year if the dollar has peaked? How will that affect bond and stock prices? This is very likely a major bear market that has is only completeding phase one.

When the Bubble Stopped

I saw a chart of monetary data that topped out in February 2021 that made me think, "Duh!" It was so obvious that I didn't record it, but now I can't remember it. So here's an attempt at finding it again. I'll post charts that broke in February or March 2021.

Here's the yoy change in the Fed's balance sheet versus BTC.

Here is ARKK and the 10yr2yr yield ratio. The yield spread peaked about a month later.

When Does the Bear Rally End and Ethereum Breakout

I give you a news item from July 2008. Cramer Declares The End Of The Bear Market

I am indeed sticking my neck out right here, right now, declaring emphatically that I believe the market will not revisit the panicked lows it hit on July 15….. Bye, bye bear market. Say hello to the bull and don’t let the door hit you on the way out.

– Jim Cramer, last night (Wed July 30), on his “Mad Money” program on CNBC

The linked post is bearish, he was only noting Cramer's call. Notably, the same guy is temporarily bullish today: The Lows Of The Year Are In

The bear market is not over. That was simply chapter 1. We’re a long way from home. This is a tactical call for the next few months.

Ethereum broke out. This initiates what should be the final leg of the bear market rally.

You Gotta Buy Low

This chart is something every bull and bear must digest. Assume a permanent portfolio such that a bull market is when there is a new high in the portfolio. History shows bull markets are the outliers when adjusted for inflation. The market spends decades basing before breaking out in what are about a decade-long bull market.

A very long and valuable discussion at Macro Value Monitor: Missing the Forest for the Trees in the Early Months of a Long-Term Bear Market

New Contrarian Indicator Drops

The Sounding Line: Another Sign of Excess Bearishness?

Good discussion at the link. I still think this is a big bear market and stock are overvalued, but destruction is a process. The potential for a straightline collapse exists if bad decisions keep piling up, but suprise surprise, the EU just declared that natural gas is green: EU parliament backs labelling gas and nuclear investments as 'green'

I take this as a sign that stupidity may be curtailed. Remember, hard times make hard men. All the woke horseshit that would get someone fired from a job, and all the bullshit green virtue signaling goes right out the window when people suddenly realize they like hot water and electricity. Once they realize the whole climate agenda is giant scam cooked up by communists and Wall Street, the whole thing will come crashing down. In any event, nuclear will be a the winner because we need massive power to fuel the economy of the future, and things like solar panels are mainly replacement, not something that will deliver 10x power supply.

10-Year Yield Minus Inflation Screams Depression

Deeply negative real yields are associated with massive recessions and bear markets.

What is the "terminal" inflation rate and what is the "terminal" yield on the 10-year bond for this bear market? Very few people are contemplating a world were the real yield is 0 percent, but inflation is 5 percent, thus the 10-year is at 5 percent. Also, consider what any elevated yield on the 10-year means for stocks. Leave aside that margins and inflation will probably curtail dividend growth at the outset of inflation and possibly until stocks such as Exxon come to dominate the index again. The S&P 500 had a 2-percent yield in the QE era. To get the yield back to 2 percent now would require a decline to 2700.

Buy the Dip

I'm a bear, but the late day action ahead of the CPI makes me think the CPI, or the reaction to it, will come in better than expected. At this point, I believe further downside would require an unquestionably bad CPI report with nothing good in it. If there is anything positive in it, such as used car prices tumbling, something, anything bulls can point to, a rally is possible. Obviously events will play out on the ground, but I generally fade the market when it frontruns news, even if I think the news ultimately overwhelms the market.

Market Panics After JPM Predicts CPI Will Come Hotter Than Expected, White House Confirms

Two Quarters of Recession Already Here

"The Federal Reserve will have to cut interest rates to fight the [stagflationary] recession." -various retards

"The Fed is hiking rates into a recession!" -various ignoramuses who never looked at a chart of the Fed funds rate and recessions in the 1970s

"The Fed can't do X!" -various bulls...with X being what will make stocks go down. The Fed will do some multiple of X.

I'm not positive a recession will be announced in July because all the data isn't in yet, but I do strongly suspect that this will be revised into a recession in 2023. The Bureau of Economic Analysis revises data each year and my suspicion is that inflation will be revised upward, turning growth into contraction.

30-Year Bonds Beat Stocks for 20 Years

Granted I'm cherry-picking a bit here, but an investor who put everything into long-term treasuries after the 2000 bubble had burst would not have underperformed stocks on their return until January 2018, and they would not have underperformed consistently until January 2021. This underperformance is up for debate since we haven't completed the cycle yet. It's possible this outperformance won't end for a few more years.

How many people know that long-term treasury bond funds beat stocks for 20 years?

It would make sense if stocks beat bonds over the coming years, but here's the scary thought for anyone holding financial assets: this ratio goes up if stocks lose less than bonds. Stocks will lose a lot if bonds go down. If the 10-year yield gets back to around 5 to 6 percent, the 30-year bond should be 6 percent or higher, which would approximate (ballparking it for simplicity) to a 50 percent drop in the price of the bond.

How Low Can Stocks Go?

Crescat is in the ballpark: Too Soon To Buy The Dip, Unless It's Commodities...

. We are now entering what in Crescat’s analysis is an inflationary recession. The index is off 15% from its all-time highs but still trading at 187% of GDP. During comparable stagflations of the early 1970s and 1980s, the associated equity bear markets did not end until the total stock market capitalization traded down to an average of 35% of GDP. Even if nominal GDP were to grow a full 20% over the next two years, not out of reason in today’s historically high inflationary environment, there is the potential for a further 78% decline in stock prices from current levels to settle at the low multiples of the last stagflationary era.

The Bear Market Hasn't Even Begun

Or why sentiment is still extremely bullish.

Yahoo: Investor fears set the table for an 'echo bubble' down the road

"I think sentiment is starting to set up as a contrarian movement with [the latest University of Michigan survey data] added to it," Sonders said, referencing her earlier tweet noting consumer expectations for stock prices are at a six-year low.

"I think [on] the behavioral side — what investors are actually doing — we're not quite there yet," Sonders adds.

Separately, a growing chorus of Wall Street analysts and traders are the sounding alarm bells on a final bear market capitulation. By implication, this means all rallies are suspect until the air clears. That may take time, as the Fed isn't likely to blink for at least a couple meetings.

On the flip side, not everyone is bearish and holding out for a final washout. Yves Lamoureux, president of Lamoureux & Co., maintains his longer-term bullish thesis for stocks into 2025.

"To me the price bottom is in. I do not expect another low in indices. The new bull market begins in earnest amid the chaos and massive panic as usual," he wrote to Yahoo Finance in a note.

Lamoureux sticks by his thesis that the 40-year trend lower in interest rates is not over — and that there will be a new deflationary scare. This will force the Fed to pivot as the economy slows, with lower rates inciting a new tech bubble trade. Or so goes the theory.

"If correct, we will see a dramatic shift of fear to FOMO, especially in tech stocks," Lamoureux writes. "They're long duration assets and they'll rally hard once market participants see rates trending lower. The tech rally will be an 'echo bubble' of the previous recent one."

Perhaps not a market for the herd to fear, after all.

Lamoureux's framework is logical. He's saying this is another correction within the 2009-??? bull market and that the conditions that produced the deep corrections of 2011, 2015, 2018 and 20202 are still operating. None of those were bear markets though, and neither is this correction if the low is in.

I think this time is different is because there has been no spike in the VIX despite five months of stock price declines. All the corrections since 2009 were sharp and swift. This one is more slow and plodding despite a few shocks. 

I also see investor complacency everywhere. I cannot say with 100 percent certainty that a bear market is underway because I do not know the future, but I can say with 100 percent certainty that the behavior of investors is 100 percent primed for a bear market. There has been no major rush for the exits. Most investors are sitting put and thinking this is another dip in the mold Lamoureux discusses. Maybe they get right one more time, who knows? 

Conditions have changed though: inflation is much higher than in any prior correction. There is no VIX capitulation spike, the put/call ratio remains elevated but with no spike, sentiment is increasingly bearish, but still extremely bullish on a long-term time frame.

I do think the inflation panic is overdone right here, but if I'm wrong about that, higher inflation will crater the market in the months ahead. The bigger risk is what I think is the more plausible bear scenario: inflation stays relatively high. Everyone looking for a Fed pause, pivot or return to 2009-2021 policy is assuming consumer inflation goes all the way back to 2 percent CPI. To get there will take a major deflationary event that sinks stocks. Without that, and without the CPI sliding much lower, inflation will settle higher than anticipated. Wage inflation will start breaking out as more workers demand double-digit pay increases to cover the multi-year rise in prices.

Bulls need inflation to collapse. They need inflation to collapse for a good reason, not a bad reason like a financial market panic, because stocks go down in that scenario. I don't see stocks going on to new highs or even going much higher at all with the S&P 500 Index already at 4120 as I'm typing. 

Bulls Will Be Wiped Out

Summary: necessary conditions for a Federal Reserve bailout of stocks are not in place yet and far from being in place.

Anything can happen in the short-term, of course bear market rallies happen without any Fed intervention.

Having said that, here is a paywalled article at ZH:

ZH: "80% Chance Of Dread": Every Time This Happened Before, The Fed Bailed Out The Market

Unless inflation risk is eliminated, the Federal Reserve cannot save the stock market. Or it could save it in nominal terms, but it would hyperinflate the U.S. economy. With the protests outside Supreme Court justices over Roe v Wade...it's frankly absurd to even think the Fed would try to do it. They are stupid, but not that stupid.

The only way it can be done in current conditions is direct buying of stocks. If they went the traditional QE route, bonds would collapse in a panic and the stock market would be below 1000 by next year. The Fed would have to print enough money and pump it directly into stocks such that stock prices outrun double-digit inflation and brush off soaring interest rates.

Maybe a bailout is coming. Maybe the world is still trapped in the QE-economy 2008—20?? That scenario involves a collapse in commodities and stocks ahead. Since commodities have barely moved yet, the major indexes would probably have to test March 2020 lows at a minimum. If inflation/commodities don't come down, then it is a bear market for sure because no rescue is coming.

Positioned Short, Thinking Long

My plan for today is to sell what I expect will be a rip and buy Monday puts. I'm going to be going through all the junior mining charts and preparing stink bids.