Since the beginning of the month, stocks have struggled to maintain their position above 4200, and the $SPX has slipped below the previous breakout level of 4100. There has been back and forth trading, rendering 4100 as useless as support or resistance. A close below 4070 would be the lowest since January, and a negative for stocks. Put-call option flow trigger sell signal despite two strong days this week. Although the market breadth has been oscillating, new 52-week highs on the NYSE continue to outpace new lows, which remains on a short term buy signal. The volatility complex remains subdued, which is generally positive for stocks. The $VIX is below its 200-day moving average, and the intermediate-term trend remains in place. The construct of volatility derivatives is back to a bullish state for stocks. The February $VIX futures have expired, and March is now the front month. There are no specific seasonal factors at right now, except that February is historically the worst month of the year. Overall, the market is consolidating for a new breakout in either direction.

The current year-to-date rally as a mirror image of the 2022 sell-off. While this is an important consideration, it’s essential to be cautious about extrapolating this short squeeze as the start of a new bull market. In October 2022, the narrative was that Powell would tighten financial conditions, making unprofitable tech companies, real estate, and YOLO investments sensible sectors to short. As inflation slows down, bond volatility drops, and risk parity and leveraged investors get the green light to buy stocks, this rally’s mechanical flows disproportionately affect the most shorted equity market sectors. The worst performers in 2022 are the best performers in 2023 due to the rally’s reflexive nature. However, it’s important to avoid extrapolating this into a new bull market because, once CTA, risk parity funds, and others are done covering their shorts, there will be a shortage of new marginal buyers. With risk-free rates at 5%, there is an alternative to investing in equities. Wait and watch for new bull market on the horizon as soon as fed is dovish again.

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