The Market: The Mythological Auto-Bid
Discussion
Joke is on me. In my December WOTE Report titled “‘Don’t Fight the Fed’eral Government” I detailed the “four puts” sitting beneath the economy and equity market: rate cut guidance, FED balance sheet, fiscal stimulus, and Yellen/Brainard TGA/RRP QE. As rates rose and the Fed pushed out cuts in January - two developments I said ex ante would limit the extent of the market advance - I ignored the power of the Four Puts.
The Four Puts are encapsulated well by the picture above. Powell, Yellen, and Brainard have an almost mythological control over financial markets. Just look at the market today: The inflation reacceleration we ALL know is coming, and will wreck financial markets in 2025, is now patently obviously upon us, rates are ripping and breadth is puking in response, yet SPOOZ can’t even move down to the 20dma. Ya, ya, OPEX flows. Give me a break. Equities should be down -3% today. And they’re not. And we all know why. Call it:
The Mythological Auto-Bid.
But not only is there a Four-Put-based Mythological Auto-Bid, there’s a fifth “put” at play: AI. Global equity capital is in search of an AI home, and the US equity market is the only available home at the moment. This is different than the prospect of an Internet-like productivity revolution as a result of AI technology itself. We’re not even there yet from an AI valuation bubble perspective. This is simply a flow of funds factor.
Combine a persistent AI bid for SPOOZ with The Mythological Auto-Bid, I will be sincerely shocked if SPX corrects more than -3% at any given time from now until Election Day, 2017-style.
And yes, I could change my mind on this tomorrow and re-position myself for a 5-10% correction. But given what I have observed YTD and am observing right here and now in the face of an obvious inflation reacceleration, this is a heads bulls win, tails bears lose market until proven otherwise.
Powell D/B/A Arthur Burns
It’s now clear the Fed is going to remove a cut from the March SEP out next week. But that alone is not enough to halt the market advance with Yellen/Brainard keeping a lid on the long end of the UST curve. To really stop the rally in its tracks Powell would have to put hikes back on the table at his presser next week; but he’s not going to do that just two weeks after telling Congress the Fed “WILL” cut rates this year. Of course, he can induce volatility by speaking “sternly” to the market, but that jig is largely up at this point. The fact of the matter is Powell is d/b/a Arthur Burns until after Election Day.
Tactical Blow-Off Top
In the aforementioned December WOTE Report I highlighted two metrics I would be watching for to assess whether a tactical blow-off top was in the works: price/20dma and price/200dma.
In June 2020 SPX tactically peaked at 108% of its 20dma. Right now SPY’s 20dma is $508, 108% of which is $549. Currently circa $513, SPY is not yet at the June 2020 tactical peak level.
At the 2018 Volmageddon peak, SPX peaked at 114% of its 200dma. SPY’s 200dma is currently $456, 114% of which is $520. Much closer than the June 2020 comp, and likely more applicable to today given the slower-moving, grinding nature of the current rally.
Portfolio Management
As I said yesterday, I am more than well aware that capitulating on a tactical pullback thesis tends to mark the tactical top. Today could be case in point. But I see what I see (The Mythological Auto-Bid), and saw what I saw (plunging IG CDX yesterday), so I adjusted positioning. However, I am very ready to adjust back if the stars align. The Trader just signaled today that a top is likely forming here if SPOOZ return to 5200, and combined with the Volmageddon 114% peak metric discussed above, a move to 5200-5250 could be a good spot to position for a tactical pullback. But we’ll see. My preference would be to tactical short an aggressive vertical move following 2-3 days in a row of +1-2% moves, not this grinding parabola.
Eyes wide open.