Last Monday I wrote that I:
- Liked fixed income as I expected bond yields to drop (I favor munis, including closed-end muni funds). That has worked and I continue to like it, though not as much as the past few weeks as the moves have been large.
- Was torn on equities. I was cautious and looking for some spirited holiday trading to convince me that long was the right trade. Wednesday, ahead of Thanksgiving, saw gains, but Friday was muted for the S&P 500 and negative for the Nasdaq 100.
I'm left really trying to figure out positioning in equities.
There are reports circulating that everyone is bearish. Those reports seem to focus on words (there is a lot of airtime given to the bears) and on things such as equity put/call ratios.
The argument against looking at put/call ratios is that they have been oscillating back and forth almost wildly and they may not do a good job of capturing the weekly and daily expiration options markets. It is truly fascinating to watch and to understand the implications of the rise of daily expiration options. I cannot think of a more leveraged bet than daily and weekly options. Most (not surprisingly) expire out of the money, but the lottery ticket nature seems to encourage the large swings in either direction to become even larger. This is an added dose of gamma to an already illiquid market, which is a recipe for large moves.
Measures such as the CNN Fear & Greed index remain firmly in "Greed" territory -- certainly not "Extreme Greed," but not indicative that "everyone" is bearish. On AAII we pulled back from last week's more bullish reading, but it is still more neutral than anything else.
Looking at the Invesco QQQ Trust's (QQQ) Relative Strength Index (RSI) shows that it by and large is in the middle, which indicates neutral positioning. Nothing in the technical charts I look at (not my area of expertise, but not something I ignore completely) was jumping out at me as bullish or bearish except for the VIX.
VIX has drifted back to just over 20, which has been problematic for equities this year.
Will VIX, quantitative tightening (QT), weakening economic data and abysmal liquidity set up a December 2018 type of scenario?
On the fund flows, the ARK Innovation ETF (ARKK) hit a record for shares outstanding two weeks ago and has seen a slight pullback. ProShares UltraPro QQQ (TQQQ) hit a record three weeks ago but also has seen small but steady outflows. I use those two ETFs as they capture the zeitgeist of the moment, and they seem to support the fact that markets actually got bullish and are now more neutral.
I see little evidence to support the "everyone is bearish" camp, at least not in equities. If anything, we could be setting up for selling pressure into year-end as the "Fed is slowing down on hikes" story is getting largely priced in. In addition, the "need to chase seasonality" trade has been put on and quantitative tightening over time will give investors the opportunity to take less risk for similarly expected returns.
On the bond side, you could convince me that people are still too bearish (because that's what I'd like to believe) and it may be true here, but with the recent move stopping out a lot of short positions I suspect that bonds are more neutrally positioned.
Bottom line
Shorter-dated bonds (two to five years) seem most interesting.
Commodity weakness should move to commodity stocks.
As for equities, with all that going on and the VIX so low, I believe too many have positioned for a year-end rally and weakness is next, so I'm still cautious on broad equity indexes.
On crypto, my belief is there is more pain out there and Bitcoin will drift lower from here (currently around $16,500).
