I will admit it, I was cautious for the better part of January. Although I understood the whole "Fed is on hold and will let the economy run hot" argument, I felt sentiment was stretched and we would experience a correction to cleanse out the exuberance (I will leave it to you to decide if it was irrational).
My stance seemed wise when the Iraq situation developed, and although I was wrong for the reason of the stock market decline, the market sold off nonetheless.
However, that decline was quickly extinguished with the lessening of tensions between America and Iran. Next thing I knew, we were once again screaming higher.
"All right, last gasp due to new-year-money being put to work", I thought to myself.
Once again, I leaned into the rise - mostly through buying equity volatility as they pushed VIX lower. I was looking for a repeat of the 2018 XIV volamegeddon when the quick rise in equity index volatility caused a self-reinforcing negative feedback loop. Although I would never wished for a flu pandemic to skate my position onside, I felt the market was looking for a reason to sell off and it was simply a question about the trigger. Once the VIX starting rising, the vanna selling would cascade on itself and we would enter a risk-off environment.
Well, I was wrong.
When did I realize it? On the second day of the coronavirus escalation, stocks got strangely strong. Although the previous day had seen a big sell off, there was zero follow through on the downside. Next thing I knew, the market seemed to shake off the news (which I felt was more serious than the market realized).
Since then the market has come to understand that the situation in Asia is indeed precarious. However, instead of stocks selling off hard, market participants have chosen to hammer economically sensitive commodities.
Look at this chart of copper, oil and the S&P 500 since the coronavirus hit the tape:
Spooz is basically unch'd! Down 1.35% since the news of the coronavirus dominated the news ticker. But copper? Down 10%! And oil? Down 13.5%!
Instead of believing the stock market is ignoring the bad news of the coronavirus, I have taken a different tack. I think it's in the market, but the bid is so strong, it is eating up the selling.
I am no longer looking for a sentiment correction. We have now had a war and a potential global pandemic. Heck, half of Asia is holed up in their apartments, and yet the American stock market keeps blasting higher.
Fighting this strength is no longer for me. Back in early January there were precious few who were bearish. Today, every fast money hedge fund manager is a virus expert loaded to the gills with bearish bets. I can no longer claim the sentiment is lopsided with too many bulls.
Now, maybe this post will be a top tick for the market. So be it. Very well could be. However, I think there are better trades out there than fading US stock market strength.
I would rather buy my bombed-out commodities. Or even grab some blue tickets on the cheap emerging markets. But most of all, I think all of this coming stimulus will be inflationary beyond belief. I am going back to fading bond strength.
But that's not the real point of today's post. What I would like to do is take readers back to 1998/1999.
I am reading a lot of comparisons to that famous dotcom rally. People are sending around charts like this one:
Sure looks similar. Why doesn't this comparison make sense?
This is a major chart crime.
I have used two different scales and this creates the illusion the two data series are following one another.
If we convert this to a percentage appreciation chart, the picture is completely different.
As you can see, in 1998 the NDX ran 80% during the same period. Today, we are only up 31%.
And when you look at the next year, 1999, it only got crazier.
Let's look at the percentage appreciation chart for the NDX during the last two years of the DotCom bubble.
Basically the NDX almost doubled in 1998, and then doubled again in 1999.
So yeah, today's market feels crazy when Tesla adds $100 each morning. But back in 1999, that was simply another day ending in the letter Y.
I am by no means advocating getting long on the assumption the bubble gets larger. However, I am no longer trying to fade the strength.
And I am open to the idea that today is similar to early 1999 with the potential for a massive squeeze higher. For all you bears that have been waiting for me to give up, this is probably a great signal. The only thing I am conceding is that the risks both ways are way higher than most believe.
Thanks for reading,