What Would Mr. Miyagi Would Do in This Market?

He would probably take a vacation to Okinawa until after Labor Day. 

But above all else, unless you are cocksure (which some seem to be) that we are in a new bull market, the presumption of an ongoing bear market actually renders the current rally increasingly dangerous. 

Specifically, as the VIX dives lower and hedges get burned into the summer sand alongside many shorts for various equities, the roadblocks to the downside become unglued if and when we see a new leg lower. That has, essentially, been the missing link since the major indices topped out several quarters ago and a major reason why I have been so tactical with my bearish bets--As noted, I have not shorted pretty much at all since just before Memorial Day with Members. The main reason being that so many others were hedged up and positioned for downside, that when the controlled demolition type of move lower occurred it was not particularly profitable, definitely not for very long. 

However, as a bear market matures we see the countless rallies, squeezes, failed breakdowns eventually wear down the put buyers and equity short-sellers. In doing so, the market no longer has the sort of foundation off of which to squeeze. Recall that short-sellers literally have to BUY to cover in order to close their short position, which creates buying demand in its own right. 

Thus, when that element is seriously diminished after a convincing bear market rally, as we are seeing now headed into a bearish seasonal period, the groundwork is being set for a sharp move down as volatility surges higher. We are getting closer to that moment, but the exact timing of it is, of course, the tricky part. 

I continue to carefully play along with a few longs, probing whether energy and commodities can break higher as the supply-drive inflationary issues remain, regardless of what The Fed does or does not do. 

However, with each passing day that bulls declare victory and that the recession is behind us (it is not), and peak inflation may be, too (possible, but inflation will likely be VERY sticky), I grow increasingly ready to pounce back on the short side for stocks and the long side for volatility.

AAPL and AMZN earnings tonight may be the beginning of the end of the rally, but I would prefer to see a few more calls for a new bull market before wading back into the short waters...