Massive Lock Out Rally Has Occurred: What's Next?
Informal note that reflects some personal thoughts - hope you enjoy.
If you’re new in my Substack community, you may have missed one of my previous posts where I made a bold claim in early January: that the Dow and the Russell would stop being turds “soon enough”. Since then, I think we know what’s happened. The Dow has skyrocketed this month in January. And the rest of the indices have recovered powerfully.
I got a bit more specific in our private community - here are the details with the screenshot below:
That the Dow would see 44000 again when it was at 42600. At the time, the chart looked like the Dow was gonna go to 0. Only problem with the bearish view at that time though was that my DCF models collectively didn’t support the Dow seeing much further downside.
On the stock selection front - that MSFT in the 420 region was a nice entry to later see 440 in Q1. MSFT at 420 looked scary in early January but we thought it was good relative value. Now suddenly everything is massively bullish at 445?
That GS/JPM would head to my DCF Bull Case. And indeed they have.
That UNH was a “no brainer” at 505 before it set a nice sequence to our DCF Base Case of 535-540.
And more…
Now that the market has completely V-shaped recovered from the period of weakness we’ve seen since mid-December, I wanted to share some thoughts.
Look, folks know that I’ve been a cautiously optimistic bull even during these massive selloff periods that make people question the overall trend (which is up).
But lately, I’ve just seen a lot of new stupidity due to the ample amounts of liquidity in the system.
Stupidity like Fartcoin.
Stupidity like Trump coin seeing market caps of $50B+.
Not to get political, but it does seem to me that capitalism is nearing the extreme part of the spectrum where some of these events could potentially be a negative sum game.
Does this mean the bull market is about to end? No. Not at all. In fact, things could get even crazier before the music stops.
But it does mean that to achieve upside going forward, there will be a new price: incredible market volatility.
I’m a bull and I like seeing things go up - in your favor, in my favor, in everyone’s favor but some of these things is just ludicrous to me and making me wonder how late in the cycle we are in.
This is why my next opinion is this in the context of the uptrend:
We’ll see ES (S&P 500) touch 6050 or below at some point in the next 3 weeks. If there is more aggressive profit taking, I don’t rule out the possibility of < 6030. We’re now 6115.
We’ll see NQ (Nasdaq-100) touch 21700 or below at some point in the next 3 weeks. If there is more aggressive profit-taking, I don’t rule out the possibility of < 21480. We’re now 21950 or so.
We’re in an overall uptrend, and I expect this to continue if we zoom out with a multi-month process.
But in the same way that I believed the Dow would stop being a turd “soon enough”, my DCF models suggest that the market needs to take a breather before it can go higher.
A pullback here would be healthy.
IF there is no breather and we continue to go higher with no consolidation period - we could be setting up for a very brief melt up followed by a very volatile February-March. In that circumstance, I believe there will again be very favorable opportunities to be found so it’s not necessarily a bad thing.
Based on my research, the end of the bull market will be marked by an important event:
A terrible miss on Big Tech earnings collectively
An inflation report that suggests we’re heading towards DE-flation or an inflation report that SPIKES. In-line reports are best for bulls. Anything too outside of consensus is not really helpful.
A massive pivot from the Fed from Dove to Hawk OR the Fed panic cutting rates because the job market is crumbling
A 10Y yield that plummets after weak jobs data
A spiking unemployment rate
These are the things that will turn me from steadfast Bull to a tactical Bear.
The reason I was convinced that the January selloff wouldn’t turn into anything more sinister was my belief that a rising 10Y yield based on good economic data (on paper) doesn’t have the macro firepower to turn the primary trend (up) to down.
This year has the opportunity to introduce one of those variables.
But I trust and know that you will be ready. Because you’re not buying sh*tcoins like Fartcoin. While in the meantime, degeneracy is taking hold across the U.S.
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