The heart of "conditioning bias" comes down to one sentence. The longer something works, the more players get drawn into playing the game. We know the junkies are on every street corner these days buying call options when the VIX is up 29% since late December with equities as measured by the S&P 500 – up just a touch more than 9% higher. 

Over the last 30 years — most of the time, the CBOE Volatility Index has been supported by investors looking for downside protection in buying puts. But 2024 is much like 1999. For most of that year, the same thing occurred. Today, many players on the field say "greed is good" and they're all buying upside.

They Love to Buy the 20 Day Moving Average

As the market grinds higher – more and more capital came into the hands of algos and quants buying the 20-day moving average. This is an important area to keep an eye on. There are so many players involved, that a violation of the 20-day moving average will likely come with a meaningful flush lower. 

What Could Alter the Equation?

In the next several weeks, we could see about $300 billion of liquidity leaving the system. This is in large part due to the tax deadline on April 15 (see "$265 Billion In Capital Gains Tax Selling: Morgan Stanley Warns Momentum Mauling Is Coming, Thanks To The IRS"). We should expect large tax revenues, in part because taxpayers have significant capital gains from the 2023 equity bull run. Treasury bill issuance will flip negative in Q2 to the tune of about $150 billion as the government runs a budget surplus for a cup of coffee. Add to that the $95 billion in monthly QT (quantitative tightening, Fed balance sheet reduction) and we could see $250 billion of liquidity drain. On top of that, this month about $75 billion of the emergency bank lending facility (BTFP loans) expired and since the facility is now closed, they may not get renewed. This causes another contraction in bank reserves