The Most Hated Rally, Part Deux

A follow up to my last post

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I haven’t written in over two months, but it’s for a good reason.

The whole way up I’ve felt like my last post, The Most Hated Rally, has pretty well covered my thoughts. Sure there were opportunities to add a few points, or discuss the news, but the whole way up we have been in the midst of…

In that post I shared my basket at the time.

I added exposure to the AI theme along the way, but even without adding, that basket has done extremely well.

Source: Bloomberg

10%+ in about two months. Not too shabby.

So while I haven’t had a ton to add these last months, I feel it’s finally time to start thinking about what comes after the rally…

August Reminder

There has been a massive vol-control bid as volatility has rolled “out of sample” for vol-control funds. That, combined with bid from almost all types of institutional investors (CTAs chasing the emergent trend, hedgies reallocating to tech, etc) has led to a sustained “crash up” rally.

My thesis the whole way up has been that as long as this structural bid remained present, we would likely grind higher.

And we have! One point to Gryffindor or whatever.

But I’m starting to see signs that things are getting frothy. Check out a few charts.

We’ve also started, in the last couple weeks, to get a bit of a “breadth” breakdown. When breadth gets weak, that can be a prelude to a sell-off.

Take a look at how breadth began weakening in December of last year and how the market started selling off about 6 weeks later.

Now, the critical among you will say “well if breadth is just starting to weaken, and weakening breadth can take months to manifest in a sell-off, what good is this information?”

That’s a good question. But whereas for the last few months’ rally we had improving breadth, and positioning that allowed a lot of length to come into the market, we are now starting to see the opposite.

That means, to me, that we are likely to see a pause in this rally for now.

So whereas for the last handful of months I have flirted with being around 100% long (or more, at times), I’m now starting to think August could be a rocky month for stocks and I’ve dialed my exposure back to about 60% long.

Parting Thoughts

Writing this newsletter has been a ton of fun. But it has also been a ton of work. I’m not sure what I will do with it going forward, or how much I’ll write. I hope this short note helps you out, and acts as a reminder not to let yourself get frothy mentally as the market gets frothy financially.

If you want to read more from me, I’d love and appreciate shares, likes and comments. Writing these things can be a lonely task sometimes!

Good luck out there.

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Disclaimer: The information provided here is for general informational purposes only. It is not intended as financial advice. I am not a financial advisor, nor am I qualified to provide financial guidance. Please consult with a professional financial advisor before making any investment decisions. This content is shared from my personal perspective and experience only, and should not be considered professional financial investment advice. Make your own informed decisions and do not rely solely on the information presented here. The information is presented for educational reasons only. Investment positions listed in the newsletter may be exited or adjusted without notice.