Overblown

In advance of the much anticipated September-October market correction, most investors were hunkered down for an impending financial storm. Throughout August, outflows from stock funds accelerated, sentiment surveys plunged to bearish extremes (both AAII and CNNMoney), and havens, gold, bitcoin and bonds, got their day in the sun in front of the gathering clouds, of both geopolitical and meteorological. But as we saw over the weekend, the appetite for destruction, (thanks Axl), from both Irma and Kim Jong-un, was less that expected. It appears that the negatives were fully priced-in and the market was ripe for a rally.

With bonds and gold now losing their bid, a major non-confirmation for the bull trend has been avoided. It also helps that the Transports and Financials and EEM are participating fully in the bounce. Breadth is now starting to improve.

Our risk model is on the right side of this trade, when, precipitated by a Vix collapse mid-last week, it kicked into risk-on mode. A confirmation from the AAII sentiment survey is likely to follow this week and the RSI momentum indicator is poised to confirm on just a the most modest of rallies.

So, as we discussed last week, maybe we can 'whip it good' and rally the market into quarter end. The earnings season was solid. The valuation issue has been neutered once again by the drop in 10 year bond yields and dovish Fed commentary. The pain trade is still working to the upside. Central Bankers' relentless force feeding of investor risk appetite continues. Following the benign tone of the moral suasion heard at Jackson Hole, they again supplied implicit put protection for the system.

Beyond the horizon, however, there is a looming issue for investors. A growing consensus has formed around a low inflation paradigm and this has lulled the monetary authorities to sleep as they fixated on the systemic risks around them.

Low rates have created a market that is impossible to correct. There is no alternative.They have created their own Catagory 5 storm, Hurricane TINA, fed by a ocean of cheap liquidity, warmed by excessive monetary ease. The storm track is up and to the right.

We all know it will ultimately end in tears, as the rising levels of debt, incentivized by this cheap liquidity, will unwind viciously when short rates rise above long. The monetary authorities have shown little willingness to create this important precondition. They are still haunted by big storm of 2008, Hurricane Alan (as in Greenspan).

So until such time as they man-up (Yellen can woman-up, I guess) and raise rates sharply, stay long or be wrong. As my old friend Pat Taylor used to say - keep buying up until the last day of the bull!