If you read our work last week you weren't surprised by the weakness markets saw this week.

Last week we said we wanted to be "pretty hedged" and to "have stops." The combination of hedge funds maxed on buying and China's health concerns were the opposite direction everybody's leaning.

There was a record day-to-day jump in the China health cases spreading on Saturday. This problem has yet to peak out.

The Fed bought a ton on Friday as an offset but it won't be enough with the China concerns.

Think about it. Think about how many bulls are in the market that don't want to let go of their positions yet we have a major health and economic impact in China and Asia.

Why are people so bullish coming into this? The US and China just came to a trade cease-fire. 2020 was setting up to be a huge year fundamentally. 2019 held up very well for tech fundamentals despite a trade war so 2020 without a trade war and the Fed pumping money should have been amazing.

So funds were getting ready for a huge year. So there's a lot of bulls long stocks and they are probably hoping the market goes up anyway, despite the news.

That means, right now you have so many bulls hoping something changes in China. But that's a dangerous position.

As long as the pace of new cases in China and Asia keeps increasing it makes sense to be on the cautious side investing wise.

The Fed also last week talked about a taper at their Fed-day press conference. People didn't call it a taper but that's what it was. There's the risk that the Fed taper through April 15th (if it happens) in combination with China's health issues can continue to weigh on a straight-up, everybody-bullish market.

And, as we talked about last week the Fed repo support is potentially due to hedge funds maxed out tapping the repo facility through their brokers. So as the Fed pulls back that may cause hedge funds to need to front-run that liquidity risk. That can add steam to the China issue for markets.

For now, it is important to watch Asian markets in the morning. They are more volatile historically than US markets but since the issues are there it's a sign that if they're going down, the US has weight on it.

PS January 2019 was up huge which was a precursor to 2019's full year. For the S&P 500 ETF SPY, which we follow most. It was actually down 16ct for January. Something different.