Bears could still be right, God bless ’em. After all, the year’s not over yet.

But as things stood headed into the back half of December, it wasn’t looking good for anyone who bet against a Santa rally.

I’m not a guy to say I told you so, but… well, how many times in October did I suggest that bonds were a falling knife worth catching? Half a dozen at least. And who was it who wrote, on October 30, that “right-tail risk is often underappreciated”?

Anyway, enough of that. US equities stormed to a seventh consecutive weekly gain on the back of a dovish Fed. Nobody was listening by the time John Williams ventured a little half-hearted push back.

The equity rally helped ease financial conditions, as did the monumental decline in bond yields since October and a steep drop in the dollar.

The S&P might as well be at a record. Investors and traders see “no reason to try and fade the enormous FCI easing ‘everything rally’ until [there’s] evidence of US economic tails realizing,” Nomura’s Charlie McElligott said. Those (hypothetical) tails are, of course, an inflation re-acceleration tied to the read-through of a rekindled wealth effect for the services-driven economy, or a hard landing.

Although PMI data released on Friday hinted that, in fact, the recent easing in financial conditions might’ve already found its way into the US services sector, conclusive evidence to suggest higher asset prices (and lower mortgage rates) are jeopardizing the “last mile” of the inflation fight is weeks or even months away (and yes, that suggests that if the “animal spirits” are indeed stirring again, it’ll be too late by the time the Fed realizes it, but c’est la vie). And if there’s a hard landing on the horizon, it’s not evident in the labor market, nor in consumer spending.

And, so, “to the moon!” as the crypto kids say. Inflows to US equity-focused ETFs and mutual funds were $25.9 billion over the latest weekly reporting period, according to EPFR data summarized by BofA. (I’m writing remotely on Friday and don’t have the actual data at my fingertips, but I have no reason to doubt BofA’s second-hand tally.)

That brings the total over nine straight weeks of inflows to more than $90 billion. The latest weekly haul, again assuming BofA’s tally is correct, would be the second-largest of 2023, narrowly besting the $25.771 billion influx during the week of November 15.

It’s worth asking, I suppose, whether we’re seeing the beginnings of an epochal rotation out of cash and into equities (and other assets). US money market funds saw their first outflow in two months over the week to December 13 and EPFR’s data suggests $31 billion in MMF redemptions over the same period.

Individual investor sentiment is the most bullish of the year. The AAII bull share hit 51.3% this week, just a tick below the high.

Note that the $90 billion inflow to US equity funds over the last two months is responsible for almost all of 2023’s net inflow.

Regular readers may be tired of hearing this (I recapitulate every Friday in my flows update), but prior to Nvidia’s Q1 report and the debt ceiling deal, net flows to US equity-focused ETFs and mutual funds were negative to the tune of almost $70 billion. (As ever, you’re reminded that behind the scenes, the active-to-passive shift is readily apparent in the flows data).

So, what would need to happen for this highly fortuitous situation to become inauspicious or outright dangerous? Well, the short answer is that everyone would have to get more long, and in feverish fashion.

“To get a crash down, you need a beaucoup ‘long’ positioning rebuild via call-buying / call gamma squeezing into a ‘spot up, vol up’ market,” McElligott said. At that point, the rally would be “easy to tip over, as stability breeds instability [via the] excess deployment of leverage,” he went on, adding that after stretches during which spot equities and volatility rise together, the Jenga tower “tend[s] to collapse under the weight of [its] own delta, as you can’t fulfill higher highs and more upside vol demand forever.”