The Pam Bondi Top

I teased this in Chart of the Week on Tuesday, but if you missed it, perhaps you saw Pam Bondi at the Epstein hearing deflecting questions by saying that we should be focused on the fact that the Dow Jones Industrial Average was above 50,000.

Gong.

That was the biggest bell-ringing top I have ever seen in the markets. We will spend most of our time talking about the market implications here, but I think it goes without saying that some things are more important than money, right?

I am a sentiment trader. I am actually less of a sentiment trader than I used to be, and I am turning into a little bit of a trend follower, but I still follow sentiment to look for big tops and bottoms in stocks. They are usually easy to spot. My friend Peter Atwater posted a great one on X recently—the tippy-top high in cocoa was marked by the CEO of Hershey getting fired. I didn’t see that at the time! Of course. Magazine covers and such. You know how this works; I don’t need to rehash it here.

Market Internals

I have been in a struggle session with the stock market for about six months, saying that we were due for a correction of some kind, and the correction never came. There were a lot of sentiment signposts along the way, but the Bondi quote was the biggest one. And of course, the next day, the market was down a smooth 1.5%. 

The internals of the market have been weakening for a while—the growthy meme-y stocks have been rolling over for the past few months. And in the last few weeks, we have a seen a big rotation out of tech and into energy, basic materials, industrials, staples, and utilities. Defensive stuff. I first learned about watching the “internals” of the market from my friend Paul, one of the most successful (and unknown) hedge fund managers in the country. Unknown, because he refuses to grow and keeps returning capital back to investors. Usually, when the internals of the market start to break down, I hear from Paul. Not coincidentally, I heard from him last week.

I always hesitate to make big market calls in my free newsletter (I do it in my paid newsletters all the time), but yes, I think the market has seen the highs, especially up against the big technical levels of 7,000 in the S&P 500 and 50,000 in the Dow. It’s just too perfect, isn’t it? The caveat here is that the market is an undead zombie and can take a baseball bat to the head and keep on coming back for more. It’s like the Walking Dead. If you are long a bunch of stocks, I would suggest lightening up here. If you are an active trader, I would consider hedging or taking a short position. If you are a plunger, like Jesse Livermore, then I would be getting short in a hurry. That’s how I feel about it.

Another caveat here is that we haven’t had a bear market in a while, and people forget that in a bear market, the bulls lose money, but the bears lose money too. Everyone loses money in a bear market because correlations go haywire. While it would be nice to make money in a bear market, the goal is to simply survive. 

My Daily Dirtnap portfolio is not perfectly hedged. I run it net long. The hedges will offset some, but not all, of the losses. I anticipate this will happen, even though much of my exposure is in emerging markets and commodities. Bear markets destroy the bulls’ capital; they destroy the bears’ capital; they destroy all capital. They’re not fun, even if you’re short. I speak from experience. In my prop book at Lehman, I calculated that I made about 18% from January to September 2008, at which point the portfolio became the property of creditors. That’s a pretty good return but, like I said, no fun.

Is There Anywhere to Hide?

You might consider hiding out in gold. Gold isn’t correlated to stocks, right? Well, since it peaked a few weeks ago, the correlation to stocks has picked up. It has become a risk asset, which is not a positive development. If stocks go down, gold will probably go down too.

I saw Michael Gayed tweeting about this the other day, in his trademark profanity. During bear markets, people often say that there is no place to hide. There is usually one place to hide: bonds. And bonds have been doing better in the last few weeks, taking a strong payroll number in stride. If you want to know why The Awesome Portfolio did so well in 2008, it was because of bonds. And everyone I know hates bonds.

Some of you are probably saying, Who is this idiot? Stocks never go down. Sure, you got the idiot part right. All I bring to this newsletter is 26 years of mistakes, lots of patience, and vaporized put premium. Maybe it’s just me, but a country that places a higher value on wealth than truth will have neither.

Jared Dillian, MFA