I have been directionally bullish for SPX and the NASDAQ up to and including the year end. That said we have managed to hit all time highs already and have consolidated above and around the 5,100 level for the SPX and I can’t help but feel there is scope for a retracement. That doesn’t mean I am bearish, rather I am hopeful for some buying opportunities, first I have to consider is there a Short Trade to be had?
So the logical thing to do is to look at how the market is positioned. First a quick look at the Smart Money/Dumb Money Confidence vs S&P500. As you can see in the chart below the Smart Money Confidence (yellow) is depressed while the Dumb Money Confidence (green) is at elevated levels and the Smart/Dumb Ratio (middle chart) is trending at levels similar to July 2020 to July 2021 when the market rose from Covid Lows.
What am I seeing here though? I am seeing dumb money getting edgy and more cautious while smart money perhaps were already cautious and have room to rise as dumb money begins to wane. It just looks like there is more room to run. As dumb money confidence falls, the price action in markets has historically risen.
It would appear that nobody is really short right now either, at least for the MEGA CAP Stocks. You have to also be aware that large Short Only Funds have closed their doors in recent years.
In the table below we see the Shares Outstanding, Floats and Short Interest for the leading US Stocks. The Shorts that were actually in play for NVDA 0.00%↑, were squeezed in the last two weeks, as it rocketed from $662 to well over $900. Will the same be said for AAPL 0.00%↑, MSFT 0.00%↑ and TLSA 0.00%↑ which all showed increased Short Interest in the last 2 weeks?
The answer is of course, I’m not sure and to be honest I don’t have the stomach to short this bull market. I don’t see a change in passive flows and with continued US Fiscal deficit spending, the US economy doesn’t show signs of abating, so something else extreme and unknown would have to happen to earnings in order for shorts to be validated. Remember that we are half way through March so basically Q1 performance is already in the bank so to speak.
To surmise, I’m adding during a retracement, but I have no heart to short this market. A take profit in May does looks attractive to me with a summer break looming, before US election fever breaks in September onwards to November.
Just to be on the safe side, lets take a look at Earnings Season this April for the Mega Caps, and judge how Forward P/E Ratios are positioned. Probably important to note at this time that the Put/Call Ratio hasn’t been above 1 since 17th January 2024.
The P/E ratios are still elevated to me, but this just appears to be the “new market norm”. Typically you’d expect a range between 18-22 times so anything above this (old school approach) looks toppy to me. As I have written before I don’t see rates coming down any time soon so on a discounted cashflow basis these P/E Ratios really do seem high. GOOGL 0.00%↑ has disappointed compared to its Mega Cap peers. That stock along with META 0.00%↑ are the only Forward P/E Ratios to March 2024 earnings within my 18-22 multiple range.
In conclusion, the market doesn’t seem to be positioned short, which could be a contra indicator to take some short positions, but I really don’t have the stomach to short this market. I am rebalancing my portfolio all the time at the moment deploying % strategies of risk on / risk off. This has negatively affected my returns in Q1 BUT I have dry powder to deploy as it seems like a market to sell rallies and buy dips. Best as always to manage your own risk according to your investment strategy.
NB: This is not financial advice and you should consult your own independent advisors before deploying any of your hard earned money into these crazy markets.