Return Of The Bear, The Magnificent 7 Are Next, TLT $115

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Early Saturday morning – even before Iran fired missiles at Israel – I wrote that the bear market was on the cusp of being resumed. In fact, I literally guaranteed it at the end of the accompanying YouTube video I made at 5 am PST. (Scroll to the end of the YouTube at the bottom of the blog to watch me guarantee it).

Three days into this week obviously I’m feeling even more confident in that call. Bulls will argue that the S&P is only 5% off its all-time highs and this is just a standard correction so far. But the ferocity of the selling and the carnage beneath the surface combined with the fundamental reasons (higher for longer and the Middle East War) convince me otherwise.

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The Nasdaq has already had a failed breakout from its previous bull market highs around 16,000 at the end of 2021. The Equal Weight S&P (RSP) is barely above that level ($158). The S&P is still a ways from falling below that level (4800) – but that’s only because the Magnificent 7 – which dominate QQQ – are holding it up. And they’re going to roll over next.

That’s where my short book is concentrated: Nvidia (NVDA), Facebook (META), Apple (AAPL), and QQQ. Once the S&P crashes through 4800, it will become clear that the last 18 months was one of the biggest head fakes in market history. I wish I knew how to trade in and out to capture all the upside of the last 18 months and the downside of the next couple of years but frankly, I think that’s impossible.

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While I am short Big Tech, the real money will be made in long-term treasuries (TLT) in my opinion. That’s because as the economy rolls over into recession the demand to borrow money for investment will plummet causing interest rates to fall. There will also be a flight to safety into treasuries as stocks, especially growth stocks, rollover. In addition, the Fed will start cutting rates to support the economy. Higher for longer is just not sustainable; the economy isn’t strong enough to withstand this level of interest rates in my opinion. My long TLT position dwarfs my short Big Tech positions.

If the economy can in fact handle higher for longer, then there is no reason for interest rates to go down and TLT rally. Indeed, this is the current consensus view: that we’re going to have a soft landing. But the historical record shows that the economy always fall into recession when the Fed hikes as much as it has in the last couple years. TLT won’t start to rally, however, until the market starts to sniff out an economic slowdown. On the other hand, the economy has become so financialized that a stock market crash would in itself result in a slowdown in the economy due to the reverse wealth effect – and that appears to already be under way for the reasons argued above.

The single-family home market is also extremely important for the wealth effect because Americans have so much equity in their homes. My forecast is that home prices will roll over as well due to the high level of current prices and mortgage rates, further intensifying the reverse wealth effect. That is why I have small short positions in the homebuilders. This hasn’t happened yet, however, one of the mains reasons apparently being the limited supply of homes in the country.

As I wrote in “The Crowd And The Contrarian” (April 6), the crowd makes money during the trend while contrarians like myself make money at inflection points when the trend reverses, the crowd is caught wrong-footed and prices rapidly adjust to the new reality. The great Jesse Livermore said the big money is made by sitting tight when you’re positioned right thereby realizing the full extent of the big market move in the offing. I still have a $115 price target for TLT which is an almost 30% move from here – though I now expect that to be reached in mid-2025 rather than mid-2024.


More By This Author:

Be OMO Not FOMO, The Resumption Of The Bear Market, NFLX Is Extremely Overvalued
The Fab 5 Are Priced For Perfection Heading Into 1Q Earnings
March CPI Comes In Hot But S&P Holds 5150

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