Roaring Fed

Just as you thought it was safe to go back in the market water, this happens. A simple tweet (below) from the Reddit ringmaster Keith Gill, aka "Roaring Kitty," set off an explosive move that has resurrected his previous hyperbolic stock promotions. GameStop and AMC bulls are back after suffering a long and painful decline since the meme stock mania in 2021. But why do I care? You know I'm a top-down guy. Stock-specific advice is seldom heard on Tuesday@11.

Roaring Kitty Tweet

How do some small, irrelevant companies relate to the stock market? Simple. It's the expectations of others, Grasshopper. And those expectations are now worrisome in their excess.

It's a symptom of a Fed that has lost the plot, fixated as they are on the past 12 months of inflation data that is driving their lurching, unpredictable actions. People are being given the green light to take risks because of the now explicit Fed backstop from easier monetary policy. Last week, Chair Powell said that rate hikes are "unlikely," so it's little wonder Roaring Kitty got back in the game. But Mr Gill is a small potato compared with the world's biggest meme trader, Jay Powell. It will eventually end in tears for these speculators, but short sellers are the only ones crying today.

Since the Dimon bottom last October, the narrative of a hard landing/seven rate cuts has flipped to one of a soft landing/two rate cuts. Investors have been walking that fine line as they regain confidence following the Fed's now-paused inflation fight. Their dovish cease-fire has led directly to renewed shenanigans from the Reddit crowd. Financial conditions are too loose for the current inflation-prone U.S. economy. But does the Fed care?

Tomorrow, we get the CPI data, which should support the notion that the disinflation trend has stalled at a point somewhat above the Fed's increasingly arbitrary 2% level. Why is that number even relevant anymore? I seem to recall that it was a 'best guess' as to the inflation level consistent with a nominal economy growing at its potential. And a 'guess', like hope, is not a strategy. It's time to revisit R*!

Inflation has become more entrenched in the economy as supply shortages have replaced consumer over-leveraging as its primary driver. Add to that the historic, unfettered profligacy of governments, which now run primary deficits in the face of full employment, and you get an artificially strong economy that risks handcuffing the Fed in its inflation mandate struggle. In the face of this fiscal largess, this Fed is not restrictive enough, and the market knows it.

But investors don't seem to care about such mundane matters. Today's Bank of America Fund Manager Survey shows the highest level of bullishness in almost three years. I guess that stands to reason. You have the Fed 'put' to back up any previously held fears of recession. You have a preference for equities over fixed income, as quality growth stocks report record earnings. And you have the vaunted "U.S. exceptionalism" that is sucking capital into the S&P500. With help from a dysfunctional OMB, the Fed has now succeeded where Donald Trump failed: "making the American stock markets great again."

As bullish as I was in October when sentiment was at a low, it's time to be more cautious at this seasonal high point. This latest rally feels hollow because the average stock has not participated broadly. Although small-cap and value rallies have been attempted, the trend line of the $BIGT, an ETF constructed of the Magnificent Seven heavyweights, has yet to break down decisively against the average stock ETF, $RSP. That is a dangerously self-fulfilling argument about the current bull market. It smacks of too much money chasing too few stocks. I'm looking at you, Jay Powell.

Mag Seven vs Market

So, under the heading of expecting the expectations of others, only one of two things can now happen. Either the market broadens out because of rate cuts from inflation that has subsided enough for the Fed to pull the trigger, or the current game of chasing the past winners continues. Tomorrow's CPI print may provide an answer. If the print is percieved to be weak, look for the game to continue with a better tone for the broad market.

If it isn't, it's GameStop.

Risk Model: 4/5 - Risk On

Sentiment, as represented in the above discussion about GameStop traders, is bifurcated. Yes, the younger crowd is getting a bit frisky, but the Boomers are still slow on the uptake. Their behavior can be seen in the AAII data, which is culled from a membership primarily composed of rich retired home gamers. The signal line is just above the indicated level of '"risk-on." Should we get a dovish interpretation of tomorrow's CPI data, I expect them to go full-on bullish. For these more conservative investors, the 'pain trade' seems to be higher. But that's a move I want to 'sell on news' as valuations and positioning will be at an extreme, setting us up for a more substantial correction later this year.

AAII Bull/Bear

I saw Jeff Currie, the ex-Goldman Sachs commodity tout, on Bloomberg this morning. Remember that I spoke of his 'early but right' call a few weeks back? Maybe I should be worried that they tracked him down for a dose of copper market cheerleading this morning. People have now woken up to the best commodity trade I've seen in years. Suddenly, the spec positioning in copper is stretched a bit. But again, it depends on the short-term unpredictable data dance being performed by the Fed. A weaker CPI is still a bullish catalyst for the now widely accepted copper bull trade. You heard it here first, though, I'm staying long.

Copper