Don’t be fooled by this post Thanksgiving rally. The shorts have had a party lately, and they are notoriously hair-triggered. So when their profits are threatened, they rush to cover their shorts.
Back when I was a kid hanging out in the customers’ gallery at Walston and Company’s downtown Philly office, on bear market rally days like this, the old traders were fond of saying this little ditty. “He who sells what isn’t his’n, must buy it back or go to prison.”
I heard that a lot! It was right up there with “Don’t fight the Fed,” and “The trend is your friend.”
The trick then was figuring out what the Fed wanted. They didn’t tell us back in those days. Policy was all a big secret. We needed guys like Dr. Doom, Henry Kaufman, then Wall Street’s top bond strategist, to read the money supply tea leaves every week to tell us what the Fed was doing. We’d all gather around the news ticker machine late every Thursday afternoon to see the money supply data, breathlessly awaiting Dr. Kaufman’s pronouncements.
Today, we have no such problem. Because of that, the message from Monday’s rally isn’t Booyah! Here’s the message.
Today, we need not guess what the Fed is doing. The Fed has this compulsion to unburden itself of its tortured policy ruminations day in and day out. And that’s on top of their official policy pronouncements. We know exactly what they’re doing, and we even get to see the evolution of their pathetic groupthink process over time.
It means that in this day and age it’s easy not to fight the Fed. We know that policy is tight, and despite all of Wall Street’s bleating, pleading, and pontificating, the Fed will stay tight for the foreseeable future. It means that we need to stay out of the markets, both for stocks and longer term fixed income, for the foreseeable future.
If you want a way to make money from the markets in this environment, you can take advantage and follow folks like our Chris Johnson, Tom Gentile, or Shah Gilani. Each of them built ultra successful careers trading the markets, not by being devoted bulls, but by taking what the market gave them. I’m comfortable recommending them because they have been perfectly willing to offer trade opportunities from the bear side when the market has called for it. And in the past, when they have recommended trades, they crushed it!
Chris recently gave his readers 23 consecutive trade recommendations that gave them a chance to pile up tremendous profits as the market was declining! Learn more about Chris’s service here.
Shah has developed a trading algorithm that does not care which direction the market is going. It can predict with 93% certainty which direction the market will go. Click here to learn about Shah’s research service. Click here to learn about Shah’s service.
Tom’s ingenious Money Calendar research service doesn’t care what direction the market is headed. It has identified seasonal patterns that pinpoint profitable trade opportunities over and over. Click here for info on Tom’s service.
There’s money to be made. It will be mostly on the short side.
But on days like Monday when the S&P rose over 40 points, when the bears who have trading short positions sniff even a hint of a rally, they buy back their shorts like mad to protect their hard earned profits. That’s why vicious vertical rallies like Monday’s are hallmarks of bear markets. They may last a day or a week, but once the short covering panic burns out, there are too few buyers on the long side to keep it going.
So here’s the thing. When we experience rallies like this, never lose sight of Rule Number One, “Don’t fight the Fed.” The Fed is tight. It is withdrawing $50 billion per month from the markets. And it will continue to do so until the market crashes and the economy tanks with it. Fed Chairman Powell has told us no less. He won’t respond to a stock market decline until there’s clear evidence of serious economic contraction.
Meanwhile, the issue of the Fed “raising rates” is a red herring. If you’ve been reading Sure Money for a while, you’re probably tired of hearing me say that the Fed is merely rubber stamping the tightening market when it raises the Fake Funds rate.
The tightening market is not just because of the Fed, but because of the disastrous Trump Regime fiscal policy.
The combination of a huge tax cut which has decimated Federal revenues, plus increased spending under the Regime’s budget busting agreement with Congress, has driven Treasury supply through the roof. The weight of that supply is crushing the money market and the bond market, and recently it has begun to pressure stock prices.
We saw this coming, of course. The Fed and the Treasury kept no secrets. Everything that was going to happen has long been a matter of record. We were just paying attention to the obvious, while Wall Street worked furiously to divert our attention.
With fear making the rounds and stocks selling off, Treasury notes and bonds rallied at times, as all available cash flowed toward the longer term Treasury market. But this bond buying is just insane. The waves of buying will lead to a demand vacuum, and potentially even a crash in the bond market. Meanwhile, short term T-bill rates have continued to skyrocket. It’s why I recently recommended staying away from bonds, and just buying and rolling short term T-bills.
A massive wave of Treasury supply has buried the market in November. Piling on to that, the TBAC (Treasury Borrowing Advisory Committee) quarterly report issued at the end of October now says that the Treasury will need to draw a total of $780 billion in net new issuance from the market over the fourth quarter of 2018 and the first quarter of 2019.
We can’t annualize that because April tax collections usually result in paydowns from mid April to mid May. But other months should be like the $150 billion+ per month rate in Q4 2018 and Q1 2019. We could be looking at more than $1.5 trillion in new issuance over the next 12 months.
The onslaught of Treasury supply will not end any time soon. What a catastrophe.
We have already seen a couple of instances of the concurrent weakness in both stocks and bonds that I have long warned you to look out for, and more are coming. Over the past week or so bonds have caught a bid and have rallied. It’s a good opportunity to get out of any bond holdings you might still have. Liquidity pressures will continue to drive T-bill rates higher. There’s no point to owning bonds under these conditions, at least until some sign that the supply demand imbalance is leveling out.
Meanwhile, you have the opportunity to profit from the stock market declines that lie ahead.