12/27/2019 - Trading Lab Morning Email
One year ago I was still hunkered down in my bunker and markets had just begun to rebound from one of the most memorable December market beatdowns in history. One year later, it wouldn't be possible to write a more different script for how markets, and market participants, are behaving.
From "the sky is falling and the long awaited bear market is here!!" TO "everything is wonderful and the S&P will never drop more than 1% again" in exactly one year. As a student of market history I have followed the recent relentless climb higher in equities with a bemused expression. On the one hand I know very well that trends tend to trend, and as a human being who is concerned with his well being I also know that walking in front of trains is bad for ones health.
However, I also know that things are rarely as good as they seem to be at bull market highs, just as they are rarely as hopeless as they feel at bear market lows. As we enter 2020 I couldn't think of a year in my lifetime in which more things could go horribly wrong than this one we are about to set foot in. Yet, if we pulled up any number of stock charts you would have to come away with the exact opposite assessment.
The following image from the "Lego Movie" sums it up nicely:
One of my favorite Twitter follows, SentimenTrader, pointed out that optimism is at a 15-year high:
And hedge funds and trend followers (such as CTAs who follow algorithmic strategies that tend to buy more at highs in order to follow trends to the very last drop) have ramped up the leverage in the last month and they are now all-in balls deep long equities....
I've seen this movie before and I know how it ends, however, I am also being patient waiting for the perfect time to take a shot at stepping in front of this train just as it's running out of steam. In a textbook end of year tactical short squeeze, I think some shorts have been getting carried out in body bags in the last couple of weeks - this process could reach a climax today or early next week. Once 2020 rolls in this market will be extremely vulnerable to a sharp downside correction.
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