After getting into cash to begin last week, we reinitiated long exposure on the open this morning moving back to near 100% invested on a notional basis.
In this Sunday's edition of Turning Points, I outlined our decision to again get long in a 16 page report. The reasons for switching from net short to net long are based on technical, sentiment and some macro reads on the market for this week.
One of the primary dilemmas that bears face going into tomorrow's CPI is that investors have become overextended in their bond and USD positioning. Namely, too many investors fell for a cooked jobs report, expressing their renewed hawkish sentiment by selling bonds and buying USD. The good ol' inflation trade came back with a vengeance throughout last week.
This sets up a real problem going into tomorrow for bears. Everything but a scorching hot CPI number (I put the probability of this at around 1%-2%) causes bond sellers and USD buyers to massively unwind the positions they built up last week.
In the meantime, last weeks selling got the bears attention in equities, with short positions being built up again, while bulls have been sidelined going into the CPI.
There are a million and one analysts parsing through the data to guess where CPI will come in tomorrow. Pinpointing the number through in depth fundamental analysis of every price point isn't what I do here.
What matters going into these types of events more than anything else is the predominant allocation of capital among investors. These types of focused allocations represent holes in the dam that markets inherently break with overwhelming force.
Tomorrow the markets will do what they like to do best: Take a sledgehammer to what everyone thought was the right allocation last week, starting with those betting on higher yields. Moving onto those betting on a higher USD. And naturally, bidding up equities as a result.
Looking for another test of 4200 (4210-4220 to be exact) this week.
Good luck tomorrow.
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