The bull market that started on October 2022 is still intact. It may change, but it hasn’t changed yet. The bond market still continues to show a bullish setup and so far, it is wrong to be on the bearish side. A soft landing is still a strong possibility. The investors are still extremely bearish. Per JP Morgan’s survey, 95% of investors think the stock market will fall for the rest of the year, and 5% think that the prices will remain the same. None (NONE!!) believe that the market may go up. This is usually a pretty good contrarian indicator.

The fund managers are also extremely exposed to defensive equities such as bonds, staples, utilities, cash, or healthcare stocks. What does this tell us? Well, at some point, there will be a moment of reallocation, namely when these fund managers realize that they are behind and will be required to show performance. As the market continues crunching higher, their current positions will hurt them. FOMO is nearby.

Nevertheless, this adds to the choppiness of the market. The market goes higher, bears buy defensive positions, mostly put options, and market makers must hedge against these positions, and that creates the rocking boat we are in right now. I saw this clearly last week in the Optionstrat flow. It was extraordinary to watch how many investors were extremely bearish, buying puts on all underlying equities like crazy. And guess what, many of these positions expired worthless this last Friday. Investors lost millions. Add to it the losses of retail investors trying to day trade 0DTE options. They lose $358,000 per day!

 

 

We are still seeing weak economic data, though. So that still may turn into a recession! However, the labor market is still extremely strong, contributing to the expectations of a soft landing.

Some market analysts say that the rate hikes already induced a mild recession, and the economic bottom has already happened. That is why we see the stock market defying the skeptics, and it keeps rallying despite their doom and gloom predictions. They say that the recession started in 2022 and is pretty much ending. Honestly, I am in the same camp.

 

 

A Bloomberg model indicates that the market (and the US economy) bottomed out in December 2022. And today, the less bad is a strong bullish force. But to know for sure, we need to wait. And while waiting, we need to approach the market carefully and with caution. This uncertainty will continue contributing to higher volatility. We saw it last week. The markets opened low almost every day (usually -0.13% to -0.65%) and then rallied the rest of the day and erased the early morning losses. This may continue.

How will it translate to our trading? Keep higher cash. Trade small, only a few positions per week, ideally one position a week, depending on your account size. And trade only after the old trades are gone. If they are not gone, close them, roll them or otherwise adjust based on your strategy, and do not open any new trade. If you just buy stocks, buy small and buy dividend stocks only. Do not buy high-flying, risky stocks. There will be plenty of opportunities once this uncertain time passes.
 

This post was published in our newsletter to our subscribers on Saturday, April 23rd, 2023. If you want to learn more about our stock technical analysis subscribe to our weekly newsletter.