Chart of the Day - I was wrong
The fact of the matter is traders and investors are often wrong a lot. Admitting it is usually the problem. Being too early is akin to being wrong. So, I am admitting it.

As you know, I think we are going into a recession. However, the soft landing narrative has clearly taken over. We see it in the stories - you see the bounce in S&P PMI? LEI doesn't really matter we are told. Jobs are still very strong which will lead to spending they say.

You see it in the Fed expectations with a pause and then cutting that will keep us above the perceived neutral rate. The bond mkt isn't saying recession. The bond mkt is saying a soft landing or an 'immaculate disinflation' as some on FinTwit call it.

In my weekly two weeks ago, I highlighted on the fundamentals of economic trend were bad, the technicals were good and the catalyst of earnings would rule the day. In the end, earnings are shrinking 6% this quarter but no one seems to care.

So when we are wrong, we need to ask ourselves what is happening and what do we do from here. The chart today shows a lot of what is happening. It shows the outperformance of the Most Short basket vs. the SPX and the net short in futures on the COT report.

Shorts had been lagging the mkt the entire back half of the year. This is a good time to be a hedge fund. So far this year? it is up 18% relative. That is a massive monthly move. The hated ARK Fund are up 23% this month, their best month ever.

The COT report shorts leveraged accounts are heavily short both S&P and Nasdaq futures. We will get the report Friday to see what the change is but the early read from desks is they are buying. Liquidity is poor and they are buying.

So shorts are scrambling and driving price up. What to do? I still see that data getting worse and not better. I see the forward P/E at 18x the highest in 21st century ex tech bubble and Covid. So investors see upside to that? I am not so sure.

Some want to look through the economic trough because mkts are forward looking. You have all seen that chart. However, earnings are just now starting to roll so it is far too early to look for when they will bottom.

We don't get the real PMI, the ISM, until next week, but the NY Fed, Philly Fed & Richmond Fed data all suggest caution is still in order. I have also written how many places I go don't seem recessionary but the data still suggest otherwise.

Finally, fincl conditions still tell me the Fed is more in play than the mkt is giving it credit for. We have heard from the doves like Brainard. We haven't heard from JayPo because he has Covid. What will we hear from the FOMC?

So I am wrong & all we can do when wrong is risk manage. Thankfully I have been in cash with some puts so the damage is limited. I have given thought to whether I need to shift my positioning but I still don't see it.

Time to stay patient and most importantly ...

Stay Vigilant
#markets #investing #trading #riskmanagement #stocks

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