Tag: SPY

I remain of the view that equities are overvalued — perhaps materially so.

I also remain of the view that, given the market structure dynamic and continued optimism on the part of most market participants (“the buy on the dip mentality continues uninterrupted”) that a sharp and extended market decline is unlikely (but not improbable). 

Instead, a sawtooth pattern lower is my baseline expectation.

For now, my objective is to take advantage of specific/unique trading opportunities. I don’t see many high-confidence buy-and-hold ideas (particularly on the long side). That said, some of my short holdings have been on my books for several years — and will remain there.   

In this backdrop and over the balance of the year, opportunistic trading seems the most appropriate tactical approach to delivering alpha. I am currently long about 12 positions and short approximately 18 positions. 

While the proximate causes for the recent market weakness are sticky inflation and higher interest rates, I continue to see other substantial headwinds that argue against new highs in equities this year:

* The likelihood that the unprecedented AI capital spending spree fails to return the cost of capital (See my More Tales From Nvidia series)

* Undisciplined fiscal policy

* Improvisational geopolitical policy that may have adverse economic reprecussions

* An equity risk discount (the ERP measures the relationship of earnings to the risk free rate of return)

* Historically high valuations

* Today’s market structure and leverage risks have not been seen in prior market cycles 

As noted recently we have rejected the notion of market broadening so popularly transmitted by Perma Bulls on Fin TV. See Mr. Market Is Not Broadening Out from August 31 in which I made the following points (H/T The Divine Ms M):

* The McClellan Index (NYSI) is faltering, the Mid Cap Index (MDY) is weakening, the Russell Index (IWM) is not “crowing” nor is the equal weighted S and P Index (RSP) participating in the markets’ recent advance…

Contrary to the near universally bullish narrative of most of the “talking heads” in the business media, the market is not broadening out — at least not as measured by the McClellan Summation Index, the Mid Cap Index, Russell and Equal Weighted S&P Indices. 

Let’s look at the facts and charts, delivered by The Divine Ms M (Helene Meisler) on TheStreetPro this morning…

Since that column, the $IWM has declined from $300 to $288 and the $RSP has dropped from  $222 to $214! 

That said, there remains a non-trivial chance that a sharp decline could materialize at any time. After all, the massive shift from active to passive management means that machines and algos rule the day. And those machines have no sense of value (but think they know everything about price).  Accordingly, “buyers live higher and sellers live lower.” So a clear momentum change lower (and I am not talking three trading sessions!) could develop into a deeper drop that I currently expect. 

Tactical Strategy

For now I am emphasizing tactical trading (shorting strength and buying weakness) — especially in shorting/covering the Indices. (I went delta neutral on my short $SPY position with the S&P cash -50 handles yesterday).

Be forewarned.

Position: None