I’ll get this out of the way and say this year has not started out as I’d hoped. I was hoping for this month to begin the next large downturn, on the cusp of which seems to be never-ending. I have been bearish since early last year, which served me well earlier on in 2022 in the broad market and helped me to get into my TSLA short last year. But something is definitely off about this market now.
We can’t seem to get a consistent rally to break upwards nor a consistent downtrend again to get to capitulation and end this bear market. I have had this thesis early last year regarding the mentality of the overall market, how everyone was truly addicted to the free money we have had for the past 13 years. I have also made the comparison of Jerome Powell to an all-powerful drug dealer providing this drug so willingly for so long. But despite his unwavering commentary that they are going to continue raising rates, the market seems to refuse to believe it. In fact, the market seems to be totally obsessive about it.
I wanted to take a step back to put a story to this entire Bear market (yes I believe we are still in the midst of a large Bear Market). This is the daily SPX 500 chart. Point 1 shows where we observed the highest inflation in 40 years. We still couldn’t manage a top and continued to rally into December of 2021. Reality started to set in once the Fed essentially declared an end to QE and the beginning of QT. We actually managed a decent decline through May to point 2.
There was obvious continued volatility since May. We saw the consolidation in June leading to the perceived beginning of a crash that didn’t happen, leading to the massive bear market rally in August, back down in October, and back up in November/December. And here we are now in January 2023, at the EXACT same place we were 8 months ago at point 3.
So, I ask myself what is the story here? I have heard both bullish and bearish arguments and both are convincing depending on the time of day and whether the day ends in “Y”. But I need to come to my own conclusions to make sense of the action we’ve seen thus far.
Going back to the chart, from point 1 to point 2 was a beginning of return to reality. Things were way overpriced and needed to cool off. We got a bear market rally in there in March, but ultimately this turned back down as we were nowhere near the end of this ride. The second downturn towards the May lows was the first reality check that really stung the bulls. It was a realization that we could not continue this constant march higher to new market highs simply because “Stonks only go up”.
But ever since then, from point 2 to point 3, we have essentially been in a massive range. We did try to escape this downtrend in August (made a higher high from the May consolidation) which subsequently failed. However, the December highs are what interest me the most (at point 4). This was the last real opportunity which really needed to work that would have convinced me that this next “bull market” is real. It would have caught every bear flat-footed (after making those new lows in October) and probably had a chance to hit new market highs from there.
But that didn’t happen. Resistance continued to hold. And while we did find short term support most recently at 3800 (after which EVERY bullish fund manager is declaring the next bull market has begun), the bullish case is sounding more and more desperate. The main driver of the market in either direction between point 2 and 3 has been so consistently the anticipation of a Fed Pivot and nothing more. And this is what I perceive as broken in the market.
Bringing back my metaphor of the drug dealer Powell, he has put his hands up and declared no more heroin for this market. Yet ever since May, the basis of all bidding (and most bullish theses I have heard thus far) is based on the speculation that the drug dealer will get a new shipment in and make everyone feel better again (despite his constant commentary that he will raise and keep rates high until inflation comes down).
So I remain steadfastly bearish in my sentiment. When the market can react to news in a way that the focus is no longer on the next hit of junk we might start to see a decent bull market start to form. But that can’t happen until we get through our rehab and get off the junk. And to do that we need to turn down eventually and capitulate.
