Not Yet

I have been watching.

In my last publication back in June, I said sell. Yes, it was early, but I've made a career of being early. Now, the hard part begins. When do we buy back? My answer: Not Yet.

The overbought S&P500 stopped dead last week, prompted by the Japan carry-trade unwind. It doesn't take much to get people to sell when valuations seem elevated, the economy slows, and the Fed seems behind the curve. But what did the buyers at S&P500 at 5600 expect—Nirvana? Sorry grunge fans, that band isn't likely to re-form any time soon.

The rally in June and July was the ultimate bag-holder suck-in of FOMO and greed. I got stopped out on my Tesla short due to the robo-taxi hype, so I know the rally was mainly short-covering. Crowded positioning, resulting from a prolonged period of low volatility, is to blame for the sudden stop. But now the jig is up for the popular game of JGB funding of long U.S. big-cap tech. The end of Japan's yield curve control has seen to that.

But it is a sideshow compared to the real culprit. The Fed is now firmly behind the curve; only more bad economic or financial news can change that. The U.S. economy is caught between the opposing forces of restrictive monetary conditions and fading fiscal support. The COVID stimulus and the profligate government budget are a form of fiscal easing that has circumvented the Fed's power over the economy. That, to me, explains why the inverted curve indicator hasn't worked. Yet.

But that support is now a fading memory as inflation has eaten away at consumer discretionary spending. The economy has been much weaker than the stock market implied due to the Mag 7 tech frenzy. It's no wonder those stocks performed worse during this week's debacle. But I wasn't sucked into the Small Cap move in July, either. The rotation we saw was also a Johnny-come-lately effort on the back of a good July inflation print. Weaker jobs data is a more important driver for Fed policy, and smaller companies are still vulnerable.

Mega Cap unwinds, Small Cap head-fakes and overbought Treasuries make an unappetizing set of choices. Your Defense should still be on the field until the game enters the fourth quarter.

Sell this bounce.

Risk Model: 2/5 - Risk Off

The Model went risk-off three weeks ago when the volatility rally and the Copper/Gold ratio collapsed. The overbought market ignored these at its peril. The U.S. economy has confused most observers because of the slowdown's glacial nature. But as the glacier economy slowly melts, there is time to wait. More unemployment bad news awaits. That will create the Fed's ah-ha moment. This week's sell-off in financial assets was welcomed by a Fed that has seen its ability to manage the market's expectations thwarted by too much cash chasing too few equities. But it hasn't changed their view.

I stand by my previous view that the market will correct when the yield curve disinverts. I'm still waiting for it. U.S. Treasury two-year bonds still yield more than 10-year bonds. Fed Funds are at the same level as when inflation was soaring and the job market was ripping. Powell's rear-view mirror approach will create an economic crunch this year. The market is beginning to sniff this out. When both currencies and bonds say 'sell risk,' you better listen.